37: Umbrella Company has a capacity of 40,000 units per year and is currently se
ID: 2665740 • Letter: 3
Question
37: Umbrella Company has a capacity of 40,000 units per year and is currently selling all 40,000 for $400 each. Buerhle Company has approached Contreras about buying 2,000 units for only $300 each. The units would be packaged in bulk, saving Contreras $20 per unit when compared to the normal packaging cost.
Normally, Contreras has a variable cost of $280 per unit. The annual fixed cost of $2,000,000 would be unaffected by the special order. What would be the impact on profits if Contreras were to accept this special order?
A. Profits would decrease $200,000
B. Profits would decrease $160,000
C. Profits would increase $60,000
D. Profits would increase more than $60,000
38: The Radek Company uses cost-plus pricing with a 30% mark-up. The company is currently selling 80,000 units at $65 per unit. Each unit has a variable cost of $47. In addition, the company incurs $240,000 in fixed costs annually. If demand falls to 40,000 units and the company wants to continue to charge the same price what profit margin percent will the company earn?
A. 22.6%
B. 26.2%
C. 57.5%
D. 30%
39: A Shavon company has total fixed costs of $6,000,000 and total variable cost of $3,000,000 at a volume level of 300,000 units. What price would be charged if the company used cost plus pricing and a markup of 25%?
A. $30.00
B. $37.50
C. $25.00
D. $12.50
40: What is the basic premise of target costing?
A. Products should be designed to meet customer needs at a price customers are willing to pay that allows the company to make a reasonable profit.
B. Products should be designed to include as many features as possible.
C. Products should be designed based on what features are technologically possible, and then marketed to customers at a price that covers the costs of design.
D. Customers are generally willing to pay for whatever companies design, so cost should not be a factor in the design process.
Explanation / Answer
Without Effect
With effect of
Special order
Special order
Sales
16000000
600000
15200000
Total revenue
16000000
15800000
less: Variable cost
11200000
10640000
520000
Contribution
4800000
4640000
Less: fixed cost
2000000
2000000
Profit
2800000
2640000
Profit decreased by
160000
Without Effect
With effect of
Special order
Special order
Sales
16000000
600000
15200000
Total revenue
16000000
15800000
less: Variable cost
11200000
10640000
520000
Contribution
4800000
4640000
Less: fixed cost
2000000
2000000
Profit
2800000
2640000
Profit decreased by
160000
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