Richter Company has a single product called a Wim. The company normally produces

Question

Richter Company has a single product called a Wim. The company normally produces and sells 87,000 Wims each year at a selling price of $39 per unit. The company’s unit costs at this level of activity are given below:

Direct materials $ 9.00

Direct labor 13.00

Variable manufacturing overhead 2.80

Fixed manufacturing overhead 6.00

Variable selling expenses 4.30

Fixed selling expenses 3.10

Total cost per unit $ 38.20

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 95,700 Wims each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 10% above the present 87,000 units each year if it were willing to increase the fixed selling expenses by $100,000.

a. Calculate the incremental net operating income.

2. Assume again that Richter Company has sufficient capacity to produce 95,700 Wims each year. The company has an opportunity to sell 8,700 units in an overseas market. Import duties, foreign permits, and other special costs associated with the order would total $2,610. The only selling costs that would be associated with the order would be $1.60 per unit shipping cost. Compute the per unit break-even price on this order.

3. One of the materials used in the production of Wims is obtained from a foreign supplier. Civil unrest in the supplier’s country has caused a cutoff in material shipments that is expected to last for three months. Richter Company has enough material on hand to operate at 20% of normal levels for the three-month period. As an alternative, the company could close the plant down entirely for the three months. Closing the plant would reduce fixed manufacturing overhead costs by 35% during the three-month period and the fixed selling expenses would continue at two-thirds of their normal level. What would be the impact on profits of closing the plant for the three-month period?

4. The company has 800 Wims on hand that were produced last month and have small blemishes. Due to the blemishes, it will be impossible to sell these units at the normal price. If the company wishes to sell them through regular distribution channels, what unit cost figure is relevant for setting a minimum selling price?

5. An outside manufacturer has offered to produce Wims and ship them directly to Richter’s customers. If Richter Company accepts this offer, the facilities that it uses to produce Wims would be idle; however, fixed manufacturing overhead costs would continue at 35%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be reduced by 60%. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer.

Explanation / Answer

A / 1 B C D E F 2 Richter Company 3 1.a) Calculation of Incremental net operating income. 4 Particulars Unit Rate at 87000 units at 95700 units 5 Sales $39.00 $3,393,000 $3,732,300 (87000*10%=8700; 87000+8700=95700 units) 6 Less: Variable Cost 7 Direct Material $9.00 $783,000 $861,300 8 Direct Labour $13.00 $1,131,000 $1,244,100 9 Variable Manufacturing OH $2.80 $243,600 $267,960 10 Variable Selling Exp $4.30 $374,100 $411,510 11 Total Variable Cost $29.10 $2,531,700 $2,784,870 12 Contribution $9.90 $861,300.00 $947,430 13 Less:Fixed Cost 14 Fixed Manufacturing OH $6.00 $522,000 $522,000 15 Fixed Selling Exp $3.10 $269,700 $369,700 ($100000 increase in fixed selling exp) 16 Total Fixed Cost $9.10 $791,700 $891,700 17 Net Operating Income $0.80 $69,600 $55,730 ($13,870) 18 Total Cost(Variable+Fixed) $38.20 $3,323,400 $3,676,570 19 20 Incremental net operating income is negative,ie.$55730-$69600=($13,870) 21 22 2) 8700 units sales in overseas market; calculation of BEP 23 Particulars Unit Rate at 87000 units 24 Sales $39.00 $3,393,000 25 Less: Variable Cost 26 Direct Material $9.00 $783,000 27 Direct Labour $13.00 $1,131,000 28 Variable Manufacturing OH $2.80 $243,600 29 Variable Selling Exp $4.30 $374,100 30 Total Variable Cost $29.10 $2,531,700 31 Contribution $9.90 $861,300.00 32 Less:Fixed Cost 33 Fixed Manufacturing OH $6.00 $522,000 34 Fixed Selling Exp $3.10 $269,700 35 Total Fixed Cost $9.10 $791,700 36 Net Operating Income $0.80 $69,600 37 Total Cost(Variable+Fixed) $38.20 $3,323,400 38 39 Total Variable Cost per unit before the special cost $29.10 40 Add: Shipping cost per unit $1.60 41 Special Costs to this order($2610/8700units) $0.30 42 Total Variable Cost per unit $31.00 43 Therefore, The Break-even Price for this order is $31.00 44 45 3) Impact of profits on temporary shutdown 46 Particulars Unit Rate at 87000 units at 69600 units 47 Sales $39.00 $3,393,000 $2,714,400 refer Note1 48 Less: Variable Cost 49 Direct Material $9.00 $783,000 $626,400 50 Direct Labour $13.00 $1,131,000 $904,800 51 Variable Manufacturing OH $2.80 $243,600 $194,880 52 Variable Selling Exp $4.30 $374,100 $299,280 53 Total Variable Cost $29.10 $2,531,700 $2,025,360 54 Contribution $9.90 $861,300.00 $689,040 55 Less:Fixed Cost 56 Fixed Manufacturing OH $6.00 $522,000 $476,325 refer Note2 57 Fixed Selling Exp $3.10 $269,700 $247,225 refer Note3 58 Total Fixed Cost $9.10 $791,700 $723,550 59 Net Operating Income $0.80 $69,600 ($34,510) $104,110 60 Total Cost(Variable+Fixed) $38.20 $3,323,400 $2,748,910 61 Note1. 62 20% of normal operations for three months= 63 Total Production per annum 87000 64 Production per quarter 21750 65 It could operate only 20% 4350 66 Therefore total production for the year shall be 67 for the shutdown quarter 4350 68 for the rest of 3quarters(21750*3) 65250 69 Total production shall be 69600 70 Note2 71 Fixed manufacturing expenses for 3 months shutdown period 72 Total fixed manufacturing OH $522,000 73 Per Quarter $130,500 74 Reduction @35% for the quarter $45,675 75 Therefore total manufacturing OH for the year shall be 76 for the shutdown quarter $84,825 77 for the rest of 3quarters($130500*3) $391,500 78 Total production shall be $476,325 79 Note3 80 Fixed Selling expenses for 3 months shutdown period 81 Total fixed selling exp $269,700 82 Per Quarter $67,425 83 2/3 will be continued $44,950 84 Therefore total Selling exp for the year shall be 85 for the shutdown quarter $44,950 86 for the rest of 3quarters($130500*3) $202,275 87 Total production shall be $247,225 88 89 The impact of profits shall be as the 3 months shut down will result into $34510 loss. 90 The overall impact shall be $104,110($69,600+$34,510) 91 92 4. The minimum selling price shall be its variable cost ie.$29.10 per unit 93 94 5. If outside supply is made 95 Particulars Unit Rate outside supply 96 costs 97 Less: Variable Cost 98 Direct Material $9.00 99 Direct Labour $13.00 100 Variable Manufacturing OH $2.80 101 Variable Selling Exp $4.30 $1.72 40% of variable selling exp 102 Total Variable Cost $29.10 $1.72 103 Less:Fixed Cost 104 Fixed Manufacturing OH $6.00 $2.10 35% of Fixed Manu OH 105 Fixed Selling Exp $3.10 106 Total Fixed Cost $9.10 $2.10 107 Total Cost(Variable+Fixed) $38.20 $3.82 $34.38 108 109 Though we receive the supply from outside, we will be incurring $3.82 per unit. 110 Therefore to compare the quote received by outsider, we have to see the rate as $38.20-$3.82 =$34.38

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.