Question 1. A company believes it can sell 5,000,000 of its proposed new optical

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Question 1. A company believes it can sell 5,000,000 of its proposed new optical mouse at a price of $10.50 each. there will be $8,000,000 in fixed costs associated with the mouse. If the company desires to make a profit $2,000,000 on the mouse, what is the target variable cost per mouse?

Question 2. A company has $30 per unit in variable costs and $1,200,000 per year in fixed costs. Demand is estimated to be 106,000 units annually. What is the price if a markup of 40% on total costs is used to determine the price?

Question 3. PowerDrive Inc. produces a hard disk drive that sells for $175 per unit. The cost of producing 25,000 drives in the prior year was:

Direct materials $625,000; Direct Labor $375,000; Variable overhead $125,000; fixed overhead 1,500,000. At the start of the current year, the company received an order for 3,400 drives from a computer company in China. Managment of PowerDrive has mixed feelings about the order. On the one hand they welcome the order because currently have excees capacity. Also, this is the company's first international order. On the other hand, the comapny in China is willing to pay only $135 per unit. What is the effect on profit accepting the order?

Question 4: Wizard Corporation has analyzed their cusstomer and ornder handling data for the past year and has determined the following costs:

Order processing cost per order....$7

Additional costs if order must be expidited (rushed)...$8.50

Customer technical support calls (per call)...$12

Relationship Management cowsts (per customer per year)...$1,200

In addition to these costs, product costs amount to 75% of Sales. In the prior year. Wizard had the following experience with one of its customers. Chester Company:

Sales....$16,000

   Number of orders...160

   Percent of orders marked rush...70%

   Calls to technical support...80

Required: Calculate the profitability of the Chester Company account._____________________

Explanation / Answer

Question 1: Total sales = Fixed cost + Variable cost + Profit

=> Total units sold * Price per unit = Fixed cost + Variable cost * Total units sold + Profit

=> Variable cost = (Total units sold * Price per unit - Fixed cost - Profit) / Total units sold

= (5,000,000 * $10.50 - $8,000,000 - $2,000,000) / 5,000,000

= $8.50

Question 2: Total sales = (Fixed cost + Variable cost) * Profit mark up

=> Total sales = (Fixed cost + Varibale cost) * 140%

=> Total units sold * Price per unit = (Fixed cost + Varaible cost per unit * Total units sold) * 140%

=> Price per unit = (Fixed cost + Varaible cost per unit * Total units sold) * 140% / Total units sold

= ($1,200,000 + $30 * 106,000) * 140%/ 106,000

= $57.85

Question 3: Varibale cost per unit = (Direct materials + Direct labor + Variable overhead) / Units produced

= ($625,000 + $375,000 + $125,000) / 25,000

= $45

Previous year profit = Total sales - Fixed cost - Varibale cost

= $175 * 25,000 - $1,500,000 - ($625,000 + $375,000 + $125,000)

= $1,750,000

Change in profit due to new order = Contribution per unit * No. of units

= (Selling price per unit - Variable cost per unit) * No. of units

= ($135 - $45) * 3,400

= $306,000 [Based on the assumption that this is an additional order over and above the existing order of previous year]

Question 4:

Profitability of Chester Company account = Sales - Order processing cost - Additional cost for orders marked rush - Cost for technical support - Relationship management cost - Product cost

= $16,000 - 160 * $7 - 70% * 160 * $8.50 - 80 * $12 - $1,200 - 75% * $16,000

= $16,000 - $1,120 - $952 - $960 - $1,200 - $12,000

= -$232 [Negative value indicates loss]

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