Curtis Cap Company has recently been approached by Bud Selig, Commissioner of Ma
ID: 2484582 • Letter: C
Question
Curtis Cap Company has recently been approached by Bud Selig, Commissioner of Major League Baseball (MLB), to manufacture 10,000 baseball caps for the 2013 All Star Game to be played at Citi Field in Queens NY next summer. Curtis makes caps similar to the ones requested and the production should not require any additional effort except for a special logo machine it will need to purchase at $8,000. The machine has no other use and would only be used for this one-time order. Curtis sells its caps to wholesalers at a price of $9.95. Selig states that he will is only willing to buy the caps if the price is less than wholesale. Its costs include material of $2.50, labor $2.25 and variable overhead equal to the labor costs. Curtis has determined that there would be no additional fixed costs, except the special machine, and wants to price the caps so that it can earn a profit of $10,000 for the order. Can Curtis meet Selig's pricing request? What price should Curtis Cap Company charge MLB for each cap?
Please show all work
Explanation / Answer
Relevant variable Manufacturing cost of one cap for the special order
= direct material + direct labour + variable overhead
= $2.50 + $2.25 + $2.25
= $7.00
Total variable manufacturing cost = 10000 x $7 = $70000
Total contribution required to earn $10000 profit
= $10000 + cost of the machine (as the machine has no other use)
= $ 10000 + $8000
= $18000
Therefore sales revenue required from 10000 caps to earn $10000 profit
= contribution + variable cost
= $18000 + $70000
= $88000
Price of the cap = $88000/10000 = $8.80
The Curtis can meet the selling price request for the special order as setting a price of $8.80 (which is less than the wholesale price as requested by buyer) will be sufficient to earn a profit of $10000 for Curtis.
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