Page 13 of 16 Question? GG Company manufactures and sells detergent in its retil
ID: 2392805 • Letter: P
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Page 13 of 16 Question? GG Company manufactures and sells detergent in its retil store in Singapore. The average production and sales are 320,000 packets per month. The company has the capacity to produce up to 400,000 packets per month. The unit cost of production and selling is given below Direct materials Direct manufacturing labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling Fixed selling Total $1.20 0.50 0.20 1.50 0.10 030 $3.80 The company sells its detergent at $5 per packet. Recently, a major customer had approached GG Company and proposed a one-off deal to buy 50,000 packets of detergent at $3 each. Required a. Compute the variable cost per packet of detergent b. Compute the total fixed cost per month. c. Compute the contribution margin per packet of detergent and the total profit of d. Using suitable calculations, advise whether GG Company should accept the manufacturing and selling 320,000 packets of detergent per month. special order. Calculate the profit GG Company could make if it accepts the special order.Explanation / Answer
Solution a:
Variable cost per packet of detergent = Direct Material + direct labor + Variable Manufacturing Overhead + Variable selling = $1.20 + $0.50 + $0.20 + $0.10 = $2.00 per unit
Solution b:
Total Fixed Cost per month = (Production capacity * Fixed manufacturing Overhead per unit)+ (sale units * fixed Selling per unit)
= 400,000*$1.50 + 320,000*$0.30 = 600,000 + 96,000 = $696,000
Solution c:
Contribution Margin per packet = Selling Price - Variable cost per unit = $5 - $2 = $3
Total profit from 320,000 packets = 320,000*contribution margin - Total Fixed costs per month
= 320000*$3 - $696,000 = $264,000
Solution d:
Since the Price of $3 of special order is more than the variable cost of $2 per unit therefore the order should be accepted.
Profit from special order = 50000 *($3-$2) = $50,000
Total Profit of the company = $264,000 + $50,000 = $314,000
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