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.

Davis Kitchen Supply produces stoves for commercial kit normal volume of 6,000 units per month are shown in the $ 53 78 28 63 Sook 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 Tint $ 222 ences 28 73 101 $ 323 Unless otherwise stated, assume that no connection exist Unless otherwise stated, assume a regular selling price of in the table or in the question itself

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 March 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. Davis 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 at a 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?

d. An inventory of 460 units of an obsolete model of the stove remains in the stockroom. These must be sold through regular channels (thus incurring variable marketing costs) at reduced prices or the inventory will soon be valueless. What is the minimum acceptable selling price for these units?

e-1. A proposal is received from an outside contractor who will make and ship 2,000 stoves per month directly to Davis’s customers as orders are received from Davis’s sales force. Davis’s fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 2,000 units produced by the contractor. Davis’s plant would operate at two-thirds of its normal level, and total fixed manufacturing costs would be cut by 25 percent. What in-house unit cost should be used to compare with the quotation received from the supplier? Assume the payment to the outside contractor is $218.
e-2. Should the proposal be accepted for a price (that is, payment to the outside contractor) of $218 per unit?

f-1. A proposal is received from an outside contractor who will make and ship 2,000 stoves per month directly to Davis’s customers as orders are received from Davis’s sales force. Davis’s fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 2,000 units produced by the contractor. The idle facilities would be used to produce 1,600 modified stoves per month for use in extreme climates. These modified stoves could be sold for $453 each, while the costs of production would be $278 per unit variable manufacturing expense. Variable marketing costs would be $53 per unit. Fixed marketing and manufacturing costs would be unchanged whether the original 6,000 regular stoves were manufactured or the mix of 4,000 regular stoves plus 1,600 modified stoves were produced. What in-house unit cost should be used to compare with the quotation received from the outside contractor? Assume the payment to the outside contractor is $218.

f-2. Should the proposal be accepted for a price of $218 per unit to the outside contractor?

Answer 1

$ 376 $.33 Quantity Revenue 9). Bylor boya Reduchan.Aften. Powice Redu. Impact Sales Price 6000 Tpoo R2520.00 23/7,000 61,000 Increase 1,113.,000 _159,000 Shereas Vawable maeuifachweing costs (9) 154,000 28,000 Thorese Vasuable Mourkeling costs (188)_168,000 1960oo $1,143,000 $1,400,000 257,000 Increas Fireol Manufactwing cost,42_378,000 378,000 fixed marketing costas (813) 438,000 438,000 Income $ 327,000 257,000 Increan Contabution margin И 0 0 584,000 Vowable manufacturing cost $532+78ť 28 =$159 a-1) Monthly sales will be Increase helich show in Part a az Yes, we would Jestem mend taking this facesse because Increase in Income Contract contract b) Total Within hout with your rout. Reg. Impact Revenue (8,000 units) 3008,000 2632,000 953.250 2885,250 -/22 Secrease Vasciable Manufacturing Costs |272,000. 1113,000 159,000 11272,000 Variable Marketing costs 224,000 196,000 196.00 28,000 Decre Contribution Margin 1912,000 1323,000 94,250 1417,250 -94750 fisced Manufacturing cost 378,000 378.000 frisced Marketing lost 438.000 438,000 Income 696,000 601,250 -94750 Regubalan Wortes Gout($376X7.000 Govte Revendle = ( 53+78_628)X1000+(37800X1000/2000)+17,000 & 159,000 + 474250+ 47,000 & 253, 250 Decrease

Variable Manufacturing Cest Minimum. Unde Deuce For_the_faraign_Merket & 43 Sluipping cost peet.Unit Marketing coste (4000/2000) Minimum unit Price d) Milwimbom Selling Price = $_2 $204 $ 1.poo 2000 * 218 174.05 Variable Marketing Cost = ds e-1 Vavable Mouseketing cart fos X20%.x2000 Fixed Manufacturing cost (363x.comX544) 78.900 Variable Manufacturing cost (159. X 2000) 318,000 Total in house cost savings 3484100 Unite In House lost saving per un't 174.05 e-2) Perco to Outside Contractor Savings per Unt (Total Inhouse Sewing/2000 unts) Should Proposal be accepted ? Nost bicepke -y Variable marketing cost (fa8x204.xdan) $ 11200 38,000 Variable Mawifechouing, cost 68189 XLamo) Contzulenkim yeom moully store (8453- 278=53) Xl6co . 195200 Total In house lost Savigs $ 524,400 Duits 262.2 In House west Saving por Unit f-2 Perice to Outside Contractos 262.2 Saving Periow't ( Total Tuhowie Savelig frað mokas Accepted Should proposal Lee accepted 43 2000 $ 2918