Assume that MTA Sandwiches sells sandwiches for 52.85 each The cos: or each sand
ID: 2332758 • Letter: A
Question
Assume that MTA Sandwiches sells sandwiches for 52.85 each The cos: or each sandwich follows: Matarials Labur Variable overhead Fixed overhead (317,370 per month, 19. 300 units per month) 0.20 0.30 0.90 Total cost per sandwich 2 20 One of MTA's regular customers asked the company to l a special order of sandwiches at a selling price of $1.95 each tor a fund-raising event sponsored by a social club at the local college. MTA has capacity to ilt without affecting total fiked costs for the month. LITA's general manager was concemed about seling the sandwiches below the cost of $2.20 per sandwich and has asked for your advice Raquired . oparc a schedu CIO show the Impact on M A's pro s o provding 400 sand c cs n additon to the og lar production and sacs o 19 300 sandwiches per month Select option higher" or lo er" keeping Status Quo the base select None " there is no e ect. Status Quo Alternetive 19,300 Units 19,700 Units Difference Salas raVAnLS Le88 varlable coste Materials Labur Variablc owerhead Total varlabla Conibution margin Less: Fixed costs Operating proit b. Based solalhy on the data ghen, what is the lowest price por sandwich at which the special order can bo lled wrhout reducing MTA s pronts? (Round your answer to 2 decimal places.) ar sanduichExplanation / Answer
Comparative Income Statement
Status Quo
Alternative
19300 Units
19700 Units
Difference
Sales Revenue
$ 55,005.00
$ 55,785.00
$ 780.00
Increase
Less: Variable Costs
Material
$ 15,440.00
$ 15,760.00
$ 320.00
Increase
Labor
$ 3,860.00
$ 3,940.00
$ 80.00
Increase
Variable Overheads
$ 5,790.00
$ 5,910.00
$ 120.00
Increase
Total Variable Cost
$ 25,090.00
$ 25,610.00
$ 520.00
Increase
Contribution Margin
$ 29,915.00
$ 30,175.00
$ 260.00
Increase
Less: Fixed Costs
$ 17,370.00
$ 17,370.00
$ -
No Change
Operating Profit
$ 12,545.00
$ 12,805.00
$ 260.00
Increase
MTA’s General Manager should not worry about selling goods below 2.2 per unit. If 400 additional sandwiches are sold at $ 1.85 the profit will still increase by $ 260 in the month.
Explanation
Fixed cost per unit decrease if units produced are increased where as variable cost remain same at per unit level although in totality variable cost increase and decrease in proportion on change in units sold/ Produced.
Fixed cost in totality remains the same whatever the activity level is . As it can be seen fixed cost at 19300 units and 19700 unit is $17370.
In the given question Relevant cost of Production is only the variable cost. The company will incur losses only if the product is sold less than Variable cost. Total variable cost is (0.80+0.20+0.30) $ 1.3 per unit. As long as sales price is higher than $ 1.3 there is nothing to worry for the manager.
Part b
Based on the given data lowest price would be $ 1.30 per sandwich
Because below $1.30 the company will incur losses since $ 1.30 is total variable cost per unit. Price should not be less than $ 1.30
Comparative Income Statement
Status Quo
Alternative
19300 Units
19700 Units
Difference
Sales Revenue
$ 55,005.00
$ 55,785.00
$ 780.00
Increase
Less: Variable Costs
Material
$ 15,440.00
$ 15,760.00
$ 320.00
Increase
Labor
$ 3,860.00
$ 3,940.00
$ 80.00
Increase
Variable Overheads
$ 5,790.00
$ 5,910.00
$ 120.00
Increase
Total Variable Cost
$ 25,090.00
$ 25,610.00
$ 520.00
Increase
Contribution Margin
$ 29,915.00
$ 30,175.00
$ 260.00
Increase
Less: Fixed Costs
$ 17,370.00
$ 17,370.00
$ -
No Change
Operating Profit
$ 12,545.00
$ 12,805.00
$ 260.00
Increase
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