Question

Munoz Modems has excess production capacity and is considering the possibility of making and selling paging equipment. The following estimates are based on a production and sales volume of 2,100 pagers 178 Unit-level manufacturing costs are expected to be $31 Sales commissions will be established at $210 per unit. The current facility level costs, including depreciation on manufacturing equipment ($71000), rent on the manufacturing facility ($61,000, depreciation on the administrative equipment ($15.300), and other foed administrative expenses (577450), will not be affected by the production of the pagers. The chief accountant has decided to allocate the facility-level costs to the existing product modems) and to the new product pagers) on the basis of the number of units of product made e, 6,100 modems and 2100 pagers! Required o. Determine the per unit cost of making and selling 2 100 pagers (Do not found intermediate calculations. Round your answer to 3 decimal places.) b. Assuming the pages could be sold at a price of $45 each should Munoz make the pages Cost perunt b houd Munt make the pages on the pagera?

Answer 1

a.

Calculate cost per unit as follows:

Total facility level costs = $71,000 + $61,000 + $15,300 + $77,450 = $224,750

Facility level costs are allocated to products based on number of units produced.

Therefore,

Facility level costs allocated to pagers = $224,750 x [2,100/(2,100 + 6,100)] = $57,558

Thus,

Facility level cost per pager = $57,558/2,100 = $27.409

Add unit level manufacturing cost and sales commission to facility level cost per pager to get the cost per unit.

Unit level manufacturing cost = $31

Sales commission = $2.10

Therefore,

Cost per unit = $27.409 + 31 + 2.10 = $60.509

b.

Yes, Munoz should make the pagers because it will provide a positive per unit contribution margin.

Per unit contribution margin = Selling price - Unit level manufacturing cost - Sales commission = $45 - $31 - $2.10 = $11.90