Project Question 4 (of 5 4. value: 10.00 points Richter Company has a single pro
ID: 2532819 • Letter: P
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Project Question 4 (of 5 4. value: 10.00 points Richter Company has a single product called a Wim. The company normally produces and sells 78,000 Wims each year at a selling price of $37 per unit. The company's unit costs at this level of activity are givern below Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses S 6.10 12.00 3.00 4.00 5.30 5.30 Total cost per unit S35.70 A number of questions relating to the production and sale of Wims are given below. Each question is independent Required: 1. Assume that Richter Company has sufficient capacity to produce 101,400 Wims each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 30% above the present 78,000 units each year if it were willing to increase the foxed selling expenses by $110,000 a. Calculate the incremental net operating income. (Negative amount should be indicated by a minus sign.) net income $ 138. 040 b. Would the increased fixed selling expenses be justified?Explanation / Answer
Requirement 1a Wims Wims Per unit Existing 30% Increase Sales unit 78000 101400 Sales Revenue 37 2886000 3751800 Less : Direct Materials 6.1 475800 618540 Direct Labor 12 936000 1216800 Variable Manufacturing Overhead 3 234000 304200 Variable selling overhead 5.3 413400 537420 Total variable cost 26.4 2059200 2676960 Contribution Margin 10.6 826800 1074840 Fixed Manufacturing Overhead 312000 312000 Fixed selling expenses 413400 523400 Total Fixed Cost 725400 835400 Operating Profit 101400 239440 There is financial advantage in investing in an additional fixed selling expenses as operating profit will increase by 138040 Requirement 1b Yes, Additional Investment is justified as there is increase in operating profit by 138040 Requirement 2 Wims Per unit Foregin Market Buyer Total Sales unit 23400 Sales Revenue 0 Less : Direct Materials 6.1 142740 Direct Labor 12 280800 Variable Manufacturing Overhead 3 70200 Variable selling overhead-shipping 3.7 86580 Total variable cost 24.8 580320 Contribution Margin Fixed Manufacturing Overhead Permits & License costs 14040 Total Fixed Cost 14040 Operating Profit Break even price per unit for this order is =(Total variable cost+Total fixed cost)/no. of order units =(580320+14040)/23400 25.4 Wims Per unit for 3 months Sales unit 3900 Sales unit for 3 months Sales Revenue 37 144300 =78000/12*3 Less : 19500 at normal level Direct Materials 6.1 23790 3900 at 20% of normal level Direct Labor 12 46800 Variable Manufacturing Overhead 3 11700 Variable selling overhead 5.3 20670 Total variable cost 26.4 102960 Contribution Margin 10.6 41340 Less : Fixed costs Fixed Manufacturing cost for 3 months 78000 Fixed Selling cost for 3 months 103350 Operating loss that can be avodied if plant is shut down -140010 The total fixed cost the company would avoid are as follow Fixed Manufacturing cost for 3 months 78000 30% of above 23400 Avoidable fixed manufacturing cost A 54600 Fixed Selling cost for 3 months 103350 1/3rd of above B 34450 So total fixed the Richter Company would avoid A+B 89050 The financial advantages of closing the plant for 3 months are Fixed cost that can be avoided-Saving in cost 89050 Net Operating Loss Company can avoid 140010 Net Financial advantage 50960 The Unit Cost figure that is relevent for setting a Minimum selling price is the variable cost per unit Direct Materials 6.1 Direct Labor 12 Variable Manufacturing Overhead 3 Variable selling overhead 5.3 Relevent unit cost 26.4 Requirement 5 Richter Company's avoidable cost per unit will be Per unit Wims Sales unit 78000 Direct Materials 6.1 475800 Direct Labor 12 936000 Variable Manufacturing Overhead 3 234000 Variable selling overhead 2.65 206700 Fixed Manufacturing Overhead 218400 Total avoidable costs 2070900 Avoidable cost per unit 26.55
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