Question

9-36 Downward demand spiral. Spirelli Company is about to enter the highly competitive personal elec- tronics market with a new optical reader. In anticipation of future growth, the company has leased a large manufacturing facility, and has purchased several expensive pieces of equipment. In 2011, the company's first year, Spirelli budgets for production and sales of 25,000 units, compared with its practical capacity of 50,000. The company's cost data follow: Home Insert Page Layout Formulas Data В 1 2 $ 24 Variable manufacturing costs per unit: Direct materials Direct manufacturing labor Manufacturing overhead Fixed manufacturing overhead 4 5 $700,000 CHAPTER 9 INVENTORY COSTING AND CAPACITY ANALYSIS Required 1. Assume that Spirelli uses absorption costing, and uses budgeted units produced as the denominator for calculating its fixed manufacturing overhead rate. Selling price is set at 120% of manufacturing cost. Compute Spirelli's selling price. 2. Spirelli enters the market with the selling price computed previously. However, despite growth in the overall market, sales are not as robust as had been expected, and a competitor has priced its product $15 lower than Spirelli's. Enrico Spirelli, the company's president, insists that the competitor must be pricing its product at a loss, and that the competitor will be unable to sustain that. In response, Spirelli makes no price adjustments, but budgets production and sales for 2012 at 22,000 units fixed costs are not expected to change. Compute Spirelli's new selling price. Comment on how Spirelli's choice of budgeted production affected its selling price and competitive position. 3. Recompute the selling price using practical capacity as the denominator level of activity. How would this choice have affected Spirelli's position in the marketplace? Generally, how would this choice affect the production-volume variance?

Answer 1

In the above case m We noticed that , Change in Unit Production capacity and impact on Manufacturing cost as well as Selling Price .

In case – Production capacity unit – 25000 ( planned capacity 50000Unit)

Total Manufacturing cost $ 100/ unit and Selling price per Unit = $120/Unit

In second Number of plan unit reduced 22000 units and change in Selling price $125/ unit because Total Manufacturing cost $ / unit also increased $ 104   ( change in $ 4 / Unit )

In last case with help of Planned capacity if unit production , Number of unit increase and simultaneously reduced in Selling price and Total manufacturing Cost . Selling price $/ Unit =103

Goo point to note that in last case total manufacturing cost $ 86 / unit is significantly reduced from first two case ( first case total manufacturing cost $ 100 , Second case total manufacturing cost $ 104 ) . definitely with this cost price , company can increase Market share .

Companies capacity = Unfavourable production volume variance

	Selling price uses Absorption Costing system
	Selling price is set 120% of Manufacturing Cost
	Fixed manufacturing OH $	7,00,000
	Spirelli budgets for Prodcution and sales Unit = 25000 Unit
	Capacityof Unit = 50000
	Fixed manufacturing Overhead rate/ Unit		Total Fixed cost/Budgeted Production in unit
	Fixed manufacturing Overhead rate/ Unit ($/ Unit )		28	($700000/25000Unit)
	Now calculate Manufacturing cost
	Direct Materials $ / Unit	24
	Direct Manufacturing Labour $ / Unit	36
	Manufacture Overhead	12
	Add - Derived above - Fixed manufacturing Overhead	28
	Total Manufacturing cost $ / Unit	100
	Selling Price of the product will be
	120% of Total Manufacturing cost
	Total Manufacturing cost $ / Unit	100
Answer 1	Selling Price- 120% Mark up(120% % $ 100)	120
Answer 2	In second case we noticed that , Budgtes Productin and Sales
	for 2012 Unit	22000
	Variable and Fixed cost are not expected to change
	Fixed manufacturing Overhead rate/ Unit ($/ Unit )		Total Fixed cost/Budgeted Production in unit
	Total Fixed cost $	7,00,000
	Number of Budgeted Unit	22000
	Fixed manufacturing Overhead rate/ Unit ($/ Unit )	32	($700000/22000Unit)
	Now calculate Manufacturing cost
	Direct Materials $ / Unit	24
	Direct Manufacturing Labour $ / Unit	36
	Manufacture Overhead	12
	Add - Derived above - Fixed manufacturing Overhead	32
	Total Manufacturing cost $ / Unit	104
	Selling Price- 120% Mark up(120% % $ 104)$	125
Answer 3	With Original planned capaicty Units	50,000
	Fixed manufacturing Overhead rate/ Unit ($/ Unit )
	Total Fixed cost $	7,00,000
	Number of Budgeted Unit	50,000
	Fixed manufacturing Overhead rate/ Unit ($/ Unit )
		14	($700000/50000Unit)
	Now calculate Manufacturing cost
	Direct Materials $ / Unit	24
	Direct Manufacturing Labour $ / Unit	36
	Manufacture Overhead	12
	Add - Derived above - Fixed manufacturing Overhead	14
	Total Manufacturing cost $ / Unit	86
	Selling Price- 120% Mark up(120% % $ 86)$	103