3. Ignace Timekeepers, Inc. manufactures and sells wrist watches. Ignace has the

Question

3. Ignace Timekeepers, Inc. manufactures and sells wrist watches. Ignace has the capacity to manufacture and sell 20,000 watches each year but is currently only manufacturing and selling 15,000. The following costs relate to annual operations at 15,000 watches: Total Cost $150,000 $120,000 Variable selling and administrative cost. $90,000 cost180,000 Variable manufacturing cost Fixed manufacturing cost Fixed selling and administrative cost.. Ignace normally sells its watches for $42 each. A discount chain is interested in purchasing Ignace's excess capacity of 5,000 watches. This special order would not affect regular sales or the cost structure above. Ignaces profits for the year will increase as long as the price on this special order exceeds how much per watch?

Explanation / Answer

Since Ignace has space capacity to produce 5000 watches, no additional fixed costs will be incureed on the production of these 5000 watches and only variable costs will be incurred on the production of these watches

TotaL variable cost for 15000 watches = Variable Manufacturing Cost+Variable Selling and Administrative Cost

=150,000+90,000 = 240,000

Variable Manufacturing Cost per Unit = 240,000/15000 = 16

Therefore, Ignace’s profit for the year will increase as long as the price per watch on this special order exceeds Variable Cost per watch i.e. $16

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