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.

Contribution Margin for: Status Quo (21,100 Cars) Alternative (21,800 Cars) Difference?

Operating Profit Status Quo (21,100 Cars) Alternative (21,800 Cars) Difference?

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? Lowest Price per car?

Answer 1

(a)

	Status Quo 21,100 Cars	Alternative 21,800 Cars	Difference
Sales Revenue	(21100 * $2.95) =$62245	(21100 * $2.95) + (700 * $1.95) =$63610	$1365	higher
Less variable costs:
Material	(21100 * $0.90) =$18990	(21800 * $0.90) =$19620	$630	higher
Labor	(21100 * $0.50) =$10550	(21800 * $0.50) =$10900	$350	higher
Variable Overhead	(21100 * $0.30) =$6330	(21800 * $0.30) =$6540	$210	higher
Total variable cost	$35870	$37060	$1190	higher
Contribution Margin	$26375	$26550	$175	higher
Less: Fixed costs	$21100	$21100	$0	None
Operating profits	$5275	$5450	$175	higher

(b) Lowest Price per Car = Variable cost per Car

i.e ($0.90 + $0.50 + $0.30) = $1.70