Question

Rutkey Collectibles is a small toy company that manufactures and sells metal replicas of classic cars. Each car sells for $2.95 The cost of each unit follows:

Materials	$	0.90
Labor		0.50
Variable overhead		0.30
Fixed overhead ($21,100 per month, 21,100 units per month)		1.00
Total costs per unit	$	2.70

One of Rutkey's regular customers asked the company to fill a special order of 700 units at a selling price of $1.95 per unit. Rutkey's can fill the order using existing capacity without affecting total fixed costs for the month. However, Rutkey's manager was concerned about selling at a price below the $2.70 cost per unit and has asked for your advice.

Required:

a. Prepare a schedule to show the impact of providing the special order of 700 units on Rutkey's profits in addition to the regular production and sales of 21,100 units per month.

b. Based solely on the data given, what is the lowest price per unit at which the model cars could be sold for the special order without reducing Rutkey's profits?

c. If Rutkey Collectibles company was operating at capacity, what would happen to operating profit if the special order was accepted?

Answer 1

Existing cost		Cost of additional Units
	Particulars	UOM	Price PU ($)			Particulars	UOM	Price PU ($)
A	Selling Price	Unit	2.95		A	Selling Price	Unit	1.95
	Cost Price PU	Unit				Cost Price PU	Unit
	Materail Cost PU	Unit	0.90			Materail Cost PU	Unit	0.90
	Labour	Unit	0.50			Labour	Unit	0.50
	Variable Overhead	Unit	0.30			Variable Overhead	Unit	0.30
B	Marginal Cost PU		1.70		B	Marginal Cost PU		1.70
	Fixed Cost	Unit	1.00			Fixed Cost	Unit	-
C	Total Cost	Unit	2.70		C	Total Cost	Unit	1.70
D	Net Contribution	Unit	0.25		D	Net Contribution	Unit	0.25
	Profit for 21,100	Units	5,275.00			Profit for 700	Units	175.00
Assumption : Refering question there are 21,200 units		Assumption : Refering question there will be no additional
Produced , fixed cost is allocated $ 1 PU			fixed cost against any further units
					Hence it is advisable to accept the offer, as it provides
					additional contribution of $0.25 PU

b. Lowest selling price should be $ 1.70, which is marginal cost of production. Hence the existing profit will not get affected.

c. If Rutkey Collectibles company was operating at capacity, hence the profit will get reduced by

20,400 units will be earning profit of ( 20,400 * $0.25 PU) = $ 5,100

700 units will be earning profit of ( 700 * (-0.75 PU)) = - $ 525

Hence the total profit will be reduced by $ 525, combined profit will be $ 4,750