Cayman Products manufactures and sells to wholesalers approximately 300,000 pack

Question

Cayman Products manufactures and sells to wholesalers approximately 300,000 packages per year of underwater markers at $3.91 per package. Annual costs for the production and sale of this quantity are shown in the table.

A new wholesaler has offered to buy 50,000 packages for $3.45 each. These markers would be marketed under the wholesaler%u2019s name and would not affect Cayman Products%u2019 sales through its normal channels. A study of the costs of this additional business reveals the following:

Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require overtime pay at one-and-one-half times the usual labor rate.

20% of the normal annual overhead costs are fixed at any production level from 250,000 to 400,000 units. The remaining 80% of the annual overhead cost is variable with volume.

Cayman Products manufactures and sells to wholesalers approximately 300,000 packages per year of underwater markers at $3.91 per package. Annual costs for the production and sale of this quantity are shown in the table.

Explanation / Answer

Per unit Dm cost = (384000/30000)

per unit DL = (96000/300000)

per unit overhead = (288000/300000)

sale = 50000*3.45 = 172500

cost of production

Direct Material = (384000/30000)* 50000 = 64000

Direct labour = (96000/300000)*50000*1.5 = 28800

Overhead = 0.8*288000*(50000/300000) = 38400

administrative expense = 4000

total cost = 135200

profit = 172500-135200 = 37300

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