A toy car sells for $6.00 at retail stores. Retail store would pay 50% of the re
ID: 2597928 • Letter: A
Question
A toy car sells for $6.00 at retail stores.
Retail store would pay 50% of the retail price and the distributor would pay 60% of the price the retailer paid. In selling the model, the manufacturer would make a gross profit of 33.3%, meaning its cost of the item is $1.20
Assume the cost of the die is $10,000 and it can be used to make 25,000 models before it wears out. If produced in house, the unite cost of the styrene material is $0.10; the unit costs of painting each model are $0.05 fixed and $0.05 variable. The plastic box it is sold in costs $0.15. The rest of the unit costs are split 2/3 fixed and 1/3 variable. The model can be produced in lots of 5,000 as warranted by sales demand.
A chinese toy company has offered to supply the completed model for $0.90 each plus $0.15 for everything involved in shipping. Provided that the U.S Company orders and pays for all 25,000 models at one time.
1.) Prepare a schedule showing unit costs [fixed and variable] of the model and breakeven sales in $$$ and units IF the US company manufactures the model car and sells it to the distributor. Which would be a better idea? continue making them in house or have the Chinese company do it.
Explanation / Answer
Solution:
Statement showing unit Cost
Particulars
Amount
Variable Cost
Cost of Die (10000/25000)
$0.40
Styrene Material
$0.10
Painting
$0.05
Plastic Box
$0.15
Other (1.20 - 0.40 - 0.10 - 0.05 - 0.15 - 0.05 = 0.45 * 1/3)
$0.15
$0.85
Fixed Cost:
Painting
$0.05
Other (1.20 - 0.40 - 0.10 - 0.05 - 0.15 - 0.05 = 0.45 * 2/3)
$0.30
$0.35
Total
$1.20
Total Fixed Cost = 25000 * 0.35 = $8,750
If US company manufacture the model car and sell it to distributor then
Contribution per unit = 1.80 – 0.85 = $0.95 per unit
Break even sales (In units) = Fixed Cost / Contribution per unit = $8,750 / $0.95 = 9211 units
Breakeven Sales (In $) = 9211 * 1.80 = $16,579.80
If we buy toy from Chinese company then unit cost of buying = $0.90 + $0.15 = $1.05 per unit
If we buy toy then we cannot avoid fixed cost of $8,750 and it will continue to be incurred; only we can save variable cost of manufacturing that is $0.85 per unit. Therefore it is not advisable to save $0.85 per unit at a cost of $1.05 per unit. Therefore US company continue to make them in house.
Statement showing unit Cost
Particulars
Amount
Variable Cost
Cost of Die (10000/25000)
$0.40
Styrene Material
$0.10
Painting
$0.05
Plastic Box
$0.15
Other (1.20 - 0.40 - 0.10 - 0.05 - 0.15 - 0.05 = 0.45 * 1/3)
$0.15
$0.85
Fixed Cost:
Painting
$0.05
Other (1.20 - 0.40 - 0.10 - 0.05 - 0.15 - 0.05 = 0.45 * 2/3)
$0.30
$0.35
Total
$1.20
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