Munafo Corporation is a specialty component manufacturer with idle capacity. Man

Question

Munafo Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 6,500 units of component VGI. Each unit of VGI requires 1 unit of material I57 and 5 units of material M97. Data concerning these two materials follow: Current Units Original Market Disposal in Cost Per Price Per Value Per Unit Unit 9.10 $ 9.40 $ 8.95 4.70 3.50 Unit Material Stock 2,400 I57 M9 33,960 4.70 Material 157 is in use in many of the company's products and is routinely replenished. Material M97 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product VGI?

Explanation / Answer

Question 1: Correct answer is $174,850

Minimum acceptable price = [(1 x $9.40) + (5 x $3.50)] x 6,500

...........................................= ($9.40 + $17.5) x 6,500

...........................................= $174,850

Question 2: Correct answer is $135,000

Particulars Amount Sales (2,500 x $304) $760,000 Less: Variable production expense ($125 x 2,500) $312,500            Variable Selling Expense ($49 x 2,500) $122,500           Fixed Production Cost $50,000           Fixed Selling Cost $75,000           Opportunity margin $65,000 Net Benefit / (loss) $135,000

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