Question

Mazeppa Corporation sells relays at a selling price of $28 per unit. The company's cost per unit, based on full capacity of 160,000 units, is as follows: Direct materials Direct labor Overhead (2/3 of which is variable) Mazeppa has been approached by a distributor in Montana offering to buy a special order consisting of 30,000 relays. Mazeppa has the capacity to fill the order. However, it will incur an additional shipping cost of $2 for each relay it sells to the distributor. a-1. Assume that Mazeppa is currently operating at a level of 100,000 units. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $4 per unit? a-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the increase in selling price? b-1. Assume that Mazeppa is currently operating at full capacity. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $60,000 more than it would be without accepting the special order? b-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the unit price charged to the distributor? Complete this question by entering your answers in the tabs below. Reg A1 Reg A2 Req B1 Req B2 Assume that Mazeppa is currently operating at a level of 100,000 units. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $4 per unit? Special Sale Selling price Less: Direct materials Direct labor Variable overhead Additional shipping costs Contribution margin per unit

Answer 1

Working note for part A1

Direct materials per unit	$6
Add: Direct labor per unit	$4
Add : Variable overhead per unit	$6
Add :Additional Shipping cost	$2
Add: Additional operating income required per unit	$4
Sales Price for order	$22

Answer A1

Selling price(derived above)		$22
Less: Direct materials	6
Direct labor per unit	4
Variable oerhead per unit	6
Additional Shipping cost	2	- $18
Contribution margin per unit		$4

Answer A2

At a current level of 100000 units, company will not have any turn away any of its regular customers in order to fill the order. If it wishes to increase operating income by $4 per unit included in special order, it only needs to generate a contribution margin per unit of $4. Thus the selling price per unit included in the special order is $22 per unit.

Answer B1

Working for B1

Direct materials per unit	$6
Add: Direct labor per unit	$4
Add: Variable overhead per unit	$6
Add: Additional Shipping cost	$2
Add: Contribution Lost [of 30000 normal sales] per unit	$12
Add: Additional contribution/income required per unit [60000/30000 units]	$2
Total Selling price per unit	$32

Now answer for part B1

Selling price (DERIVED ABOVE)		$32
Less: Direct materials	6
Direct labor per unit	4
Variable overhead per unit	6
Additional Shipping cost	2	- $18
Contribution margin per unit		$14

Answer B2

In order for company to increase its operating income $60000 above, the contribution margin per unit must be $2 per unit more than normal contribution margin. The normal contribution margin is the sales prices $28 less all variable cost [6 + 4 + 2/3 x 9] or $12. Thus selling price of special order must cover the additional shipping cost and still result in contribution margin of $14 per unit ($12 normal + $2 additional requirement). Therefore a selling price of $32 is required.