Question

Assume that MTA Sandwiches sells sandwiches for $3.55 each. The cost of each sandwich follows. Materials Labor Variable overhead Fixed overhead ($24,750 per month, 22,500 units per month) Total costs per sandwich $0.90 0.80 0.20 1.10 $ 3.00 One of MTA's regular customers asked the company to fill a special order of sandwiches at a selling price of $2.45 each for a fund- raising event sponsored by a social club at the local college. MTA has capacity to fill it without affecting total fixed costs for the month. MTA's general manager was concerned about selling the sandwiches below the cost of $3.00 and has asked for your advice. Required: a. Prepare a schedule to show the impact on MTA's profits of providing 500 sandwiches in addition to the regular production and sales of 22,500 sandwiches per month. b. Based solely on the data given, what is the lowest price per sandwich at which the special order can be filled without reducing MTA's profits?

Answer 1

Ans 1 Less Status Quo Alternative Difference 22500 units 23000 units Sales (a) $ 79,875 $ 81,100 $1,225 Higher Variable cost Material $ 20,250 $ 20,700 $ 450 Higher Labour $ 18,000 $ 18,400 $ 400 Higher Variable o/H $ 4,500 $ 4,600 $ 100 Higher Total Variable cost (b) $ 42,750 $ 43,700 $ 950 Higher Contribution Margin (a-b)={c} $ 37,125 $ 37,400 $ 275 Higher Fixed cost (d) $ 24,750 $ 24,750 Same Operating profit (c-d) $ 12,375 $ 12,650 $ 275 Higher Less Notes 1 Sales for 22500 units are at the rate $3.55 each and Sales for 23000 units are at the rate ($3.55*22500 u + $2.45*500 u) 2 Variable cost differ on the basis of no of units produced 3 Fixed cost remains same irrespective of no of units produced Ans 2 Lowest price would be by covering the variable costs only that is material+labour+variable o/H =0.9+0.8+0.2 $1.90 per sandwich