Question

I am confused with this problem. Please help! thank you!
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 Direct labor Overhead (2/3 of which is variable) 4 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

a-1 Spare capacity exists
		Special Sale
Contribution Margin per unit		2
Add: Direct Material	6
Direct Labor	4
Variable Overhead	6
Additional Shipping costs	2	18
Selling price per unit		20
$2 per unit, $2
Selling price is $20 per unit
b-1 No spare capacity
		Special Sale
Operating Income per unit		2
Add: Regular Selling Price	28
Additional Shipping costs	2	30
Selling price per unit		32
28 - (6+4+2/3*9) = $12 per unit
$12 normal + $2 additional
Selling price of $32 is required