Ovation Company has a single product called a Bit. The company normally produces

Question

Ovation Company has a single product called a Bit. The company normally produces and sells 52,800 Bits each year at a selling price of $42 per unit. The company's unit costs at this level of activity are given below: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses $12.00 6.00 2.10 3.30 ($174,240 total) 5.10 3.60 ($190,080 total) Total cost per unit $32.10 A number of questions relating to the production and sale of Bits follow. Each question is independent Required: 1. Assume that Ovation Company has sufficient capacity to produce 79,200 Bits each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the current 52,800 units each year if it were willing to increase the fixed selling expenses by $90,000 a. Calculate the incremental net operating income Incremental operating income b. Would the increased fixed selling expenses be justified? O Yes No 2. Assume again that Ovation Company has sufficient capacity to produce 79,200 Bits each year. A customer in a foreign market wants to purchase 13,200 Bits. Import duties on the Bits would be $1.70 per unit, and costs for permits and licences would be $5,940. Both import duties and permits and licenses will be paid by Ovation. The only selling costs that would be associated with the order are $3.60 per unit shipping cost. Compute the per unit break-even price on this order. (Do not round your intermediate calculations. Round your answer to 2 decimal places.) Break-even price per unit

Explanation / Answer

1. (a)
Unit selling price= $42
     Less: unit variable cost = 25.2
Unit conributional margin= 16.8
Increased sales in unit=52800×25%=13200
Incremental contributional margin= 13200×16.8=$2,21,760
Less: additional fixed expense= $90000
Incremental operating income= $1,31,760
(b) yes

2. Variable manufacturing cost per unit=$20.1 (12+6+2.1)
Import duties per unit = 1.7
Permit and licence =5940/13200=0.45
Selling cost per unit=3.6
Break even price per unit= $ 25.85

3. The relevant cost is $5.10, which is the variable selling cost because the irregular unit have already been produced, and all production cost are sunk. The fixed cost are not relevant because they will incur whether or not the irregular unit sold.

4. Contribution margin lost = (16,368)
          Fixed cost
             Fixed manufacturing overheaad cost = $11,616 (174240×2/12×40%)
                Fixed selling cost =                    $6,336                                                                      (190080×2/12×20%)=6336
Impact on profit for closing plant for two months = ($1,584)

Note- Contribution margin lost = unit price =42
            Variable expense= 12+6+2.10+5.10= 25.2
             Contribution margin= 16.8
52800 bits×2/12×30%= 2640
= 2640×16.8= 44,352
Fixed cost= 174240+190080= 364320×2/12= 60720
Net income= (16,368)    ( 44352- 60720=16368)

5. Variable manufacturing cost =    $20.1          
     Fixed manufacturing overhead cost = $2.31 (3.3×70%)
     Variable selling expense=               $1.7 ( 5.10×1/3)
       Total avoidable cost =   $24.11

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