Question

answers in red are wrong.

Exercise 4.31 x Your answer is incorrect. Try again. The Cullumber packages and distributes three grades of animal feed. The material cost per tonne and estimated annual sales for each of the products are listed here: Material Estimated Product Cost Sales Super Premium $10.00 1,900 tonnes Premium 8.00 2,800 tonnes Economy 7.00 4,700 tonnes The fixed cost of operating the machinery used to package all three products is $10,500 per year. In the past, prices have been set by allocating the fixed operating cost to products on the basis of estimated sales in tonnes. The resulting full costs (material costs plus allocated fixed operating cost) are then marked up 200%. The Cullumber has received an offer from a foreign firm for 900 tonnes of the premium-grade feed. Sales to the foreign firm would not affect domestic sales but would require a $1,800 increase in fixed production costs. (c) Using only quantitative information, what is the minimum price that the Cullumber's managers should be willing to accept from the foreign firm? Price for order: 9800

Answer 1

Fixed cost is the cost which is allocated equally among all the manufactured units.

so here given fixed cost is 10500 on total = 9400 units (1900+2800+4700).

Increase in 900 units increase fixed cost by 1800.

hence total fixed cost is 10500+1800= 12300

total no. of units= 9400+900=10300

so, fixed cost per unit is 12300/10300 = 1.19

fixed cost of 900 units = 1.19*900 =1071

variable cost of 900 units= 8*900= 7200 (premium category)

total cost for 900 units = 1071+7200= 8271

marked up cost is 200% = 8271*200%= 16542