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. $53 Unit manufacturing costs Variable materials Variable labor Variable overhead Fixed overhead Total unit manufacturing costs Unit marketing costs Variable Fixed Total unit marketing costs Total unit costs Unless otherwise stated, assume that no connection exists between the situation described in each question, each is independent. Unless otherwise stated, assume a regular selling price of $376 per unit Ignore income taxes and other costs that are not mentioned in the table or in the question itself Required: a. Market research estimates that volume could be increased to 7.000 units, which is well within production capacity limitations if the price were cut from $376 to $331 per unit. Assuming that the cost behavior patterns implied by the data in the table are correct a-1. What would be the impact on monthly sales, costs, and income? a-2. Would you recommend taking this action? b. 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 Merch manufacturing costs" plus pay a $47.000 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? c. Devis has an opportunity to enter a highly competitive foreign market. An attraction of the foreign market is that its demand is greatest when the domestic market's demand is quite low, thus, idle production facilities could be used without affecting domestic business. An order for 2.000 units is being sought ato below-normal price to enter this market. For this order shipping costs will total $43 per unit, total marketing costs to obtain the contract will be $4.000. No other variable marketing costs would be required on this order, and it would not affect domestic business. What is the minimum unit price that Davis should consider for this order of 2.000 units?

Answer 1

Variable manufacturing cost per unit
Variable Materials	53
Variable labor	78
Variable overhead	28
Total variable manufacturing cost per unit	159
Solution a-1:
	Before Price Reduction	After Price Reduction	Impact
Sales Price	376	331
Quantity	6000	7000
Revenue	2256000	2317000	61000	Increase
Variable manufacturing costs	954000	1113000	159000	Increase
Variable Marketing costs	168000	196000	28000	Increase
Contribution margin	1134000	1008000	-126000	Decrease
Fixed Manufacturing costs	378000	378000	0	None
Fixed marketing costs	438000	438000	0	None
Income	318000	192000	-126000	Decrease
Solution a-1:
No, we would not recommend taking this income because of Decrease in Income.
Solution b:
	Without Government Contract	With Government Contract			Impact
		Regular	Government	Total
Revenue	3008000	2632000	253250	2885250	-122750	Decrease
Variable manufacturing costs	1272000	1113000	159000	1272000	0	None
Variable Marketing costs	224000	196000	0	196000	-28000	Decrease
Contribution margin	1512000	1323000	94250	1417250	-94750	Decrease
Fixed Manufacturing costs	378000			378000	0	None
Fixed marketing costs	438000			438000	0	None
Income	696000			601250	-94750	Decrease
Government Revenue = 159*1000+(378000*1000/8000)+47000 = $253,250
Solution c:
Minimum Unit Price For the Foreign Market
Variable Manufacturing cost	159
Shipping cost per unit	43
Marketing Costs ($4000/2000)	2
Minimum Unit price	204
Solution d:
Minimum Selling Price =	Variable Marketing cost =	28
Solution e-1:
Variable marketing cost ($28*20%*2000)	11200
Fixed Manufacturing costs ($63*6000*25%)	94500
Variable Manufacturing cost [159*2000]	318000
Total In house cost savings	423700
Units	2000
In House cost saving per unit	211.85
Solution e-2:
Price to Outside contractor	218.00
Savings per unit (Total Inhouse savings/ 2000 units)	211.85
Should Proposal be accepted	Not accepted
Solution f-1:
Variable marketing cost ($28*20%*2000)	11200
Variable Manufacturing cost [159*2000]	318000
Contribution from modified Stove [(453-278-53)*1600]	195200
Total In house cost savings	524400
Units	2000
In House cost saving per unit	262.20
Solution f-2:
Price to Outside contractor	218.00
Savings per unit (Total Inhouse savings/ 2000 units)	262.20
Should Proposal be accepted	Accepted

Answer 2

a1) before price reduction 

revenue= 6000*376= 2,256,000

variable manufacturing cost: 6000* 159= 954,000

variable marketing cost: 6,000*28(variable overhead)= 168,000

contribution margin: 2,256000- 954,000- 168,000= 1134000

fixed manufacturing cost: 6000*63(fixed overhead)= 378,000

fixed marketing cost: 6,000* 73(fixed units marketing)= 438,000

Income: 1,134,000- 378,000- 438,000= 318,000

after price reduction

revenue: 7000 *331= 2,317,000

variable manufacturing cost: 7000* 159= 1113000

variable marketing cost: 7000* 28= 196,000

contribution margin: 2,317,000- 1113000- 196,000= 1,008,000

fixed manufacturing cost: 378,000

fixed marketing cost: 438,000

Income: 1,008,000- 378,000- 438,000= 192,000

 Impact: before-after

B1) without government contract

revenue: 8,000* 376(a1)= 3,008,000

variable manufacturing cost: 8,000*159= 1,272,000

variable marketing cost: 8,000*28= 224,000

contribution margin: 3,008,000- 1,272,000- 224,000= 1,512,000

fixed manufacturing cost: 378,000 from a1

fixed marketing cost: 438,000 from a1

Income: 1,512,000- 378,000- 438,000= 696,000

with gov't contract (regular)

revenue: 7,000(from a)* 376= 2,632,000

variable manufacturing cost: 7,000* 159= 1,113,000

variable marketing cost: 7,000* 28= 196,000

contribution margin: 2,632,000- 1,113,000- 196,000= 1,323,000

with gov't contract (gov't)

revenue: 159* 1000+(378,000(fixed man cost)*1000/8000(1b))+47000(1b)= 253,250

variable manufacturing cost: 159*1,000= 159,000

variable market cost= 0

CM: 253,250- 159,000= 94,250

with gov't contract (total): regular+gov't

impact: without gov't contract- with gov't contract(total)