he contribution margin per pound of the constraining 2. Assuming that Barlow has
ID: 2572545 • Letter: H
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he contribution margin per pound of the constraining 2. Assuming that Barlow has unlimited demand for each of its three products 3. Assuming that Barlow's estimated customer demand is 500 units per e 6000 4. A foreign supplier could furnish Barlow with additional stoks of theustomer demerial in contribution margin the company can earn when using the 6,000 pounds what contribution margin the company can earn when using the b per product line, what is the material on hand? stantial premium over the usual price. Assuming Barlows 500 units per product line and that the company has used its an optimal fashion, what is the highest price Barlow Company additional pound of materials? Explain. should be willing to pay for a EXERCISE 12-9 Special Order Decision LO12-4 Delta Company produces a single product. The cost of producing and selling a sing product at the company's normal activity level of 60.000 units per year is and selling a single unit of this $5.10 $3.80 $1.00 $4.20 $1.50 $2.40 Direct materials Direct labor Fixed manufacturing overhead Variable selling and administrative expense Flxed selling and administrative expense year. An order unit. The normal selling price is $21 per unit. The company's capacity is 75,000 units per ye has been received from a mail-order house for 15,000 units at a special price of This order would not affect regular sales or the company's total fixed costs Required: 1. What is the financial advantage (disadvantage) of accepting the special order? 2. As a separate matter from the special order, assume the company's inventor $14.00 per 1,000 units of this product that were produced last year and that The units must be sold through regular channels at reduced prices. What for establishing a minimum selling price for these units? Explain. are inferior to the current model. unit cost is relevant minimum selling price for these units? Explain. EXERCISE 12-10 Make or Buy Decision LO12-3 Futura Company from a supplier for the price of $8.40 per unit. Due to a reduction in output, the company now idle capacity that could be used to produce the starters rather than buying them from an outside supplier. However, the company's chief engineer is purchases the 40,000 starters that it installs in its standard line of farm tractors opposed to making the starters because the production cost per unit is $9.20 as shown below Per Unit Total $3.10 Direct materials Direct labor Depreciation Variable manufacturing overhead … … . Rent 2.70 1.50 $60,000 1.00 $40,000 0.60 030 $12.000 Total production cost $920 If Futura decides to make the starters, a supervisor would have to be hired (at a salary of 560,000) to oversee production. However, the company has sufficient idle tools and machinery such that no new equipment would have to be purchased. The rent charge above is based on snace utilized in the plant. The total rent on the plant is $80,000 per period. Depreciation is due to obso- lescence rather than wear and tear. Required: What is the financial advantage (disadvantage) of making the 40,000 starters instead of buyin them from an outside supplier?Explanation / Answer
12-9
Fixed costs do not change because of accepting this order hence not relevant for decision making
2. As calculated above relevant unit costs= 11.4 per unit
12-10:
Depreciation and rent are not incremental costs so not relevant for decision making.
Special order pricing is based on variable costing principles, only incremental costs should be considered for decision making and pricing rather including allocated costs as well Incremental contribution received from the special order is the amount of advantage of disadvantage of accepting special order: 1. Financial advantage/(dis advantage) of acceipting the special order: Ref: units Unit rate Amount A Sale revenue 15000 14 210000 B Incremental costs: Direct materials 15000 5.1 76500 Direct labor 15000 3.8 57000 Variable manufacturing OH 15000 1 15000 Variable selling and adm expenses 15000 1.5 22500 Total incremental costs 15000 11.4 171000 C=A-B Financial advantage/(disadvantage) 15000 2.6 39000Related Questions
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