Question 28 (Grade: 20 points-Suggested Time: 19 minutes Nickel Company makes a

Question

Question 28 (Grade: 20 points-Suggested Time: 19 minutes Nickel Company makes a single product with the following characteristics: Price-$70 per unit, and a variable cost $46 per unit. Production at Nickel Company is constrained by machine hours. Each product needs 2 machine hours and there are 1,000 machine hours available the upcoming period. Fixed manufacturing cost is allocated to products using machine hours as the cost driver and a cost driver rate of $20 per machine hour. Planned production is 400 Part A (Grade 8 Points-Suggested Time 8 minutes) Nickel Company has just receive that will have a variable cost of $20 per unit and will require 2.5 machine hours minimum (floor) price that Nickel Company should charge per.unit for this response to the space provided and show all calculations d a request to produce and supply 50 units of a new product order? Confine your 400x2:9o0 Available machine hours 1000-800-200. Hours need to fill the order is 50 25 125 Therefore thereare no capacity sues. no oituniy Co-t Floor price per unit Variable cost $20 per unit Part B (Grade 12 Points-Suggested Time 10 minutes) Return to the information in part A. Assume now that the order is for 100 units. If the order is accepted all 100 units must be supplied and Nickel Company would sacrifice whatever production of the existing product is needed to fill the order. If production of the current product is reduced by any amount ickel Company must pay a penalty of $1,00 to its existing customers. What is the minimum (floor) price that Nickel Company should charge per unit for this order? Confine your response to the space provided and show all calculations Available machine hours 1000-800 200. Hours need to fill the order is 100 2.5 250 Units supplied with available idle hours 200/2.5 80. cost of these 80 units # 80.20-$1,600 Remaining units require 20*2.5 50 hours, Opportunity cost per machine hour (70-46)/2- $12 Cost of remaining 20 units 20*20+12 50 $1,000 Total cost 1600+1000+1500 $4,100 4100/100 $41.00 per unit floor price

Explanation / Answer

In Part B, a penalty would be incurred if the order accepted earlier is not delivered. Since the existing order cancellation is due to the aceptance of new offer, it will become relevant cost of the project.

I see it is written "must pay a penalty of as $1,00 to its existing customer" Probably it is a typo error. This cost is relevant to the order pricing and will be taken in consideration. There is no other cost I see is missing in solution.

Suggestions for Minimum price question solving:

1. Key rule is "Fixed overhead do not change per unit". If the company is having spare capacity, making new order in house wouln't affect the exisitng overheads.

2. If the New order is constrained by the comitted delivery, Opportunity cost is to be calculated.

3. Variable cost per unit always remain same.

4. All the relevant cost to be identified and considered. Relevant cost means Opportunity cost+ Any other cost incurred specifically for new order.

5. Special cost for order should not be ignored while evaluating the price.

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