Question

Page 153 4-38. Pricing Decisions (QLO 4-1, Ø 2) Assume that MTA Sandwiches sells sandwiches for $7.20 each. The cost of each sandwich follows. Materials $2.70 Labor 0.90 Variable overhead 0.45 Fixed overhead ($10,800 per month, 6,000 units per month) 1.80 Total costs per sandwich $5.85 One of MTA's regular customers asked the company to fill a special order of sandwiches at a selling price of $5.40 each for a fund-raising event sponsored by a social club at the local college. MTA has capacity to fill it without affecting total fixed costs for the month. MTA's general manager was concerned about selling the sandwiches below the cost of $5.85 and has asked for your advice. Required a. Prepare a schedule to show the impact on MTA's profits of providing 400 sandwiches in addition to the regular production and sales of 6,000 sandwiches per month. b. Based solely on the data given, what is the lowest price per sandwich at which the special order can be filled without reducing MTA's profits? c. What other factors might the general manager want to consider in setting a price for the special order?

Answer 1

Sale Price Variable Cost Material labor 0.9 Variable Overheads Total 0.45 4.05 Contribution 3.15 Special order of 400 sandwich will earn additional contribution Sale price 5.4 Less: Variable cost 4.05 Contribution 1.35 Special order sandwi 400 Total Contribution 540

Regular Sale 7.2 43200 Special Sale Total 5.4 2160 Sale 453601 Variable Cost Material 2.7 labor 0.9 Variable Overheads 0.45 Total 4.05 16200 2.7 5400 0.9 2700 0.45 24300 4.05 1080 360 180 1620 17280 5760 2880 25920 3.15 18900 1.35 540 Contribution Fixed Cost Net Profit 19440 10800 8640 b Lowest price can be variable cost. $4.05 The reason is that, for producing special order, only variable cost will increase to that extent. If the sale price is more or equals to variable cost than existing profit will not reduce. General Manager is thinking about the total cost per unit of the product. Total cost includes the fixed cost. Fixed cost is already recovered by the regular sale, therefore it is not relevant for the special order. So, to satisfy the client and to earn additional profit of $540, sale price of $5.4 can be accepted.