Question

Mazeppa Corporation sells relays at a selling price of $28 per unit. The company's cost per unit, based on full capacity of 160,000 units, is as follows:

Direct materials	$	6
Direct labor		4
Overhead (2/3 of which is variable)		9

Mazeppa has been approached by a distributor in Montana offering to buy a special order consisting of 30,000 relays. Mazeppa has the capacity to fill the order. However, it will incur an additional shipping cost of $2 for each relay it sells to the distributor.

a-1. Assume that Mazeppa is currently operating at a level of 100,000 units. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $2 per unit?

a-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the unit price charged to the distributor?

b-1. Assume that Mazeppa is currently operating at full capacity. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $60,000 more than it would be without accepting the special order?

b-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the unit price charged to the distributor?

Answer 1

a1) If Mazeppa Corp is working on 100000 units, then
unit price of the special order would be:
Variable cost + Addi Shipping cost+ operating income=
($6+4+(9*2/3)) + 2 +2 = $20 per unit
(on working on under capacity, the fixed cost could be avoided for special order)
a2) Contribution margin has reduced from $12 (ie.28 - 16) to $2 (ie. $20 - 18).
Operating income has reduced from $9 (ie. $28-19) to $2 (ie. $20 -18) on
special order.
b1) If Mazeppa Corp is working on full capacity, then
unit price of the special order & generate $60000 more would be:
Previous selliing price+Addi. Shipping cost + Addi. Operating Income
$28 + $2 + $2 = $32 per unit
(on working on full capacity, all costs are considered)
a2) Contribution margin has raised from $12 (ie.28 - 16) to $14 (ie.32 - 18).
Operating income has raised from $9 (ie. $28-19) to $11 (ie. $20 -18) on
new special order.