Alton Inc. is working at full production capacity producing 35,000 units of a un

Question

Alton Inc. is working at full production capacity producing 35,000 units of a unique product. Manufacturing costs per unit for the product are Direct materials Direct labor Manufacturing overhead $11 10 12 Total manufacturing cost per unit $ 33 The unit manufacturing overhead cost is based on a $4 variable cost per unit and $280,000 fixed costs. The nonmanufacturing costs, all variable, are $10 per unit, and the sales price is $50 per unit. Sports Headquarters Company (SHC) has asked Alton to produce 7,500 units of a modification of the new product. This modification would require the same manufacturing processes. SHC has offered to share the nonmanufacturing costs equally with Alton. Alton would sell the modified product to SHC for $35 per unit. Required 1-a. Calculate the contribution margin for 7,500 units for both the current and special order. Contribution margin Current Special order

Explanation / Answer

Ans:

1-a Current order:

Contribution margin per unit = $50-$11-$10-$4-$10=$15 per unit

For 7500 units= $112500

Special order:

Contribution margin= $35-$11-$10-$4-$5=$5 per unit

For 7500 units=$37500

1-b

No; Alton should not produce special order for SHC as there is contribution loss of $75000($112500-$37500).

2.

Working at less than full capacity :

Minimum price that Alton should accept= $11+$10+$4+$10=$35(relevant cost for producing the order)

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