Additional Instructions : Show all calculations and include clear explanations.
ID: 2580636 • Letter: A
Question
Additional Instructions:
Show all calculations and include clear explanations.
Case Problem:
Below are The Great Pen Company unit costs of manufacturing and marketing a high-style pen at an estimated out-put level of 20,000 units per month.
Manufacturing costs:
Direct materials $1.00
Direct manufacturing labor 1.20
Variable manufacturing indirect costs 0.80
Fixed manufacturing indirect costs 0.50
Marketing costs:
Variable $1.50
Fixed 0.90
REQUIRED:
Each situation is independent from the others. Unless stated otherwise, assume each pen sells for $6.00 each. Choose the best answer to each question. Show all calculations. You must show all your work to receive credit for this assignment. Each question is worth 4 pts.
1.What is the unit cost of each pen if The Great Pen Company produces only 10,000 total pens per month?
a.$3.00
b.$3.50
c.$5.00
d.$2.20
e.$5.90
2.A contract with the government for 5,000 pens calls for the reimbursement of all manufacturing costs plus a fixed fee of $1,000. No variable marketing costs are incurred on the government contract. You are asked to compare the following two alternatives:
Sales Each Month to Alternative A Alternative B
Regular customers 15,000 pens 15,000 pens
Government 0 pens 5,000 pens
On a per month basis, operating income under Alternative B is greater than under Alternative A by
a.$1,000
b.$2,500
c.$3,500
d.$300
e.None of these.
3.Assume the same data with respect to the government contract as in requirement 2 except that the two alternatives to be compared are:
Sales Each Month to Alternative A Alternative B
Regular customers 20,000 pens 15,000 pens
Government 0 pens 5,000 pens
On a per month basis, operating income under Alternative B relative to that under Alternative A is
a.$4,000 less
b.$3,000 greater
c.$6,500 less
d.$500 greater
e.None of these
4.The company received a one-time-only offer for 10,000 units from a company in a foreign market in which price competition is keen. The company expects that shipping costs for this special order will amount to only $0.75 per unit. However, the company will incur an additional $4,000 fixed marketing costs due to meeting complex foreign market regulations. The company incurs no variable marketing costs other than the shipping costs. Domestic business will be unaffected by the offer. The selling price per unit to break-even is
a.$3.50
b.$4.15
c.$4.25
d.$3.00
e.$5.00
5.The company as an inventory of 1,000 units of pens that must be sold immediately at reduced prices. Otherwise, the inventory will be worthless. The unit cost that is relevant for establishing the minimum selling price is
a.$4.50
b.$4.00
c.$3.00
d.$5.90
e.$1.50
6.A proposal was received from an outside supplier who will make and ship these high-style pens directly to The Great Pen Company’s customers as sales are forwarded from company’s sales staff. Fixed marketing costs will be unaffected, but the company’s variable marketing costs will be slashed by 20%. The company’s plant will be idle, but its manufacturing overhead will continue at 50% of present levels. What is the maximum price per unit the company would be willing to pay the outside supplier? (Hint: Calculate the unit cost saving if no longer making the part.)
a.$4.75
b.$3.95
c.$2.95
d.$5.35
e.$3.55
Explanation / Answer
Estimated
output level
Unit cost
Total
Fixed manufacturing cost
20000
0.50
10000
Fixed marketing cost
20000
0.90
18000
Calculation of total variable cost per unit
Direct materials
1.00
Direct manufacturing labour
1.20
Variable manufacturing indirect cost
0.80
Variable marketing cost
1.50
4.50
1. Calculation of unit cost for 10000 pens
Total variable cost
4.5
Total fixed cost (0.50+0.90)
1.4
Total cost per unit
5.90
2
Income with alternative A
Sale price
6
Total cost
-5.9
Profit per unit
0.1
Profit for 15000 units
1500
Income with alternative B
Profit when sales to Government
1000
Profit for 15000 units to regular customer
1500
Total profit
2500
Note: Since government is reimbursing all incurred cost and is
paying 1000 additionaly profit would be additional amount of
$ 1000
Hence (a) $1000 is the correct answer.
3
Income with alternative A
Sale price
6
Total cost
-5.9
Profit per unit
0.1
Profit for 20000 units
2000
Income with alternative B
Profit when 15000 units
(As calculated in (2))
1500
Profit when sales to Government
1000
Profit for 20000 units in alternative B
2500
Alternative B earns more than alternative A by $500
4
Fixed cost
4000
Units
10000
Fixed cost per unit (4000/10000)
0.4
Selling price per unit for breakeven
Direct materials
1.00
Direct manufacturing labour
1.20
Variable manufacturing indirect cost
0.80
Shipping cost
0.75
Fixed cost as calculated above
0.40
4.15
Selling price would be (b) $4.15 per unit.
Estimated
output level
Unit cost
Total
Fixed manufacturing cost
20000
0.50
10000
Fixed marketing cost
20000
0.90
18000
Calculation of total variable cost per unit
Direct materials
1.00
Direct manufacturing labour
1.20
Variable manufacturing indirect cost
0.80
Variable marketing cost
1.50
4.50
1. Calculation of unit cost for 10000 pens
Total variable cost
4.5
Total fixed cost (0.50+0.90)
1.4
Total cost per unit
5.90
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