Question

Davis Kitchen Supply produces stoves for commercial kitchens. The costs to manufacture and market the stoves at the company's normal volume of 6,000 units per month are shown in the following table.

Unit manufacturing costs
Variable materials	$	52
Variable labor		77
Variable overhead		27
Fixed overhead		62
Total unit manufacturing costs				$	218
Unit marketing costs
Variable		27
Fixed		72
Total unit marketing costs					99
Total unit costs				$	317
On March 1, the federal government offers Davis a contract to supply 1,000 units to military bases for a March 31 delivery. Because of an unusually large number of rush orders from its regular customers, Davis plans to produce 8,000 units during March, which will use all available capacity. If it accepts the government order, it would lose 1,000 units normally sold to regular customers to a competitor. The government contract would reimburse its "share of March manufacturing costs" plus pay a $48,000 fixed fee (profit). (No variable marketing costs would be incurred on the government's units.) Assuming that the government's "share of March manufacturing costs" will be the proportionate fixed manufacturing cost, what impact would accepting the government contract have on March income? (Select option "increase" or "decrease", keeping without government contract as the base. Select "none" if there is no effect.) Show less Without Government Contract With Government Contract Impact Regular Government Total Revenue $2,992,000 $2,618,000 decrease Variable manufacturing costs Variable marketing costs Contribution margin Fixed manufacturing costs Fixed marketing costs Income

Answer 1

Answer with working is given below

With Government Contract Regular Government Total Impact $250,500 $156,000 Revenue Variable manufacturing cost Variable marketing cost Contribution Margin Fixed Manufacturing cost Fixed marketing cost Net Operating Income Without Government Contract $2,992,000 $1,248,000 $216,000 $1,528,000 $372,000 $432,000 $724,000 $2,618,000 $1,092,000 $189,000 $1,337,000 $325,500 $432,000 $579,500 $94,500 $46,500 $2,868,500 $123,500 Decrease $1,248,000 $0 None $189,000 $27,000 Decrease $1,431,500 $96,500 Decrease $372,000 $0 None $432,000 $0 None $627,500 $96,500 Decrease $48,000 Net Income will reduce by $96,500 hence government contract should not be accepted working note Per Unit $156 $52+$77+$27) $27 Variable cost Variable manufacturing cost Variable marketing cost Fixed cost manufacturing Marketing $372,000 (6,000 * $62) $432,000 (6,000 * $72) Sales $2,992,000 $374 selling price Units $2,618,000 $374 7,000 8,000 Variable Manufacturing cost Share of Fixed manufacturing cost Fixed Fee Total Revenue - Government $156,000 (1000 * $156) $46,500 ($372,000/8000*1000) $48,000 $250,500