King Manufacturing produces a single product. The cost of producing and selling
ID: 2587044 • Letter: K
Question
King Manufacturing produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: Direct materials $38.80 Direct labor (variable cost) $9.70 Variable manufacturing overhead $2.30 Fixed manufacturing overhead $18.10 Variable selling & administrative expense $1.70 Fixed selling & administrative expense $8.80 Normal selling price per unit $85.10 An order has been received from an outside customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.20 less per unit on this order than on normal sales. Required: (a) Suppose the company has ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $75.30 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? (b) Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the minimum acceptable price per unit for the special order? (c) Suppose the company does not have enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,000 units for regular customers. What would be the minimum acceptable price per unit for the special order? (d) What are some of the issues other than capacity that King Manufacturing should consider in determining the price per unit for the special order? Discuss at least 2 issues in detail.
Explanation / Answer
King Manufacturing Company per unit Original Requirment a Requirment b Requirment c Sales Units 40000 3000 Minimum acceptable price for this order is the anything above the variable cost of 52.3. Because we are operating at profit in our normal capacity and our fixed overhead are getting absorbed by capacity. So anything we receive above our variable cost will be our profit. Minimum acceptable price for this situation will be our (variable cost for 3000 units+ contribution lost on 1000 units) Sales Revenue 85.1 3404000 75.3 225900 Less : Variable cost Direct Material 38.8 1552000 38.8 116400 Direct Labor 9.7 388000 9.7 29100 Manufacturing overhead 2.3 92000 2.3 6900 Selling & administrative expenses 1.7 68000 1.5 4500 Total Variable cost 52.5 2100000 52.3 156900 Contribution/Margin 32.6 1304000 69000 so it will be Less : Fixed Manufacturing overhead 724000 0 =3000*52.3+1000*32.6 Less : Fixed Selling overhead 352000 0 189500 Total fixed cost 1076000 0 divide by 3000 units Operating profit 228000 69000 Minimum acceptable price is Increase in Net operating profit = 63.17 Requirement d 1 Disturbance in customer relationship As we are cutting the order of 1000 units from regular customer, we might end up spoiling our relationship with him/her/them. It may so happen that we eventually end up losing our customer permanantly as there is all probability that he may find another vendor for buying for this order and future orders. 2 We need to verify whether this outside customer is willing to buy from us in future also. What will be his need in future in terms of units. How long he will stay with us in future for business purpose.
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