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. $ 44 69 19 54 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 $ 186 19 64 83 $ 269 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 $402 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 dimitations if the price were cut from $402 to $357 per unit. Assuming that the cost behavior patterns implied by the data in the table are correct. 0-1. 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

Answer 1

A1. Calculation of impact on present scenario if price is changed

Particulars	Presnt	Expected	Impact
Units	6000	7000	1000
Sales price	402	357	(45)
Total sales:	2412000	2499000	87000
Variable manufacturing cost (44+69+90)	(1218000)	(1421000)	(203000)
Variable marketing cost (19)	(114000)	(133000)	(19000)
Fixed manufacturing cost (54*6000)	(324000)	(324000)	0
Fixed marketing cost (64*6000)	(384000)	(384000)	0
Net profit	372000	237000	(135000)

A2 . No should not be accepted as it results in decrease of profit.

B Fixed manufacturing cost of march = 324000

Share for 1000 units = (324000*1000)/8000 =40500

Consideration received from goverment = 40500+56000 = 96500

Particulars	Present	Expected if military order taken	Impact
Units	8000	7000+1000 military	0
Sales	@402 = 3216000	(402*7000)+96500 =2910500	(305500)
Less variable cost (44+69+19)	1056000	1056000	0
Less: fixed manufacturing cost	324000	324000	0
less: variable marketing cost	8000*19 =152000	7000*19 =133000	19000
less: fixed marketing cost	384000	384000	0
Net profit	1300000	1031500

should Not be accepted military order

c. Claculation of minimum Price for export order.

Fixed cost will not be considered as they are irrelevant and sunk cost. whether the order is taken or not, foxed cost will remian same.

Material(2000*44)	88000
Labour(2000*69)	138000
variable manufacturing overhead(2000*19)	38000
Marketing cost	6000
Total	270000
Per unit Minimum selling price	135

D. while calculation minimum selling price for obsolete material, it should be the cost of removing the material from such place. So, minimum variable marketing cost should be covered while selling those dead stock. minimu price $19 per unit ( variable marketing cost)

Note: since in question student has not asked the number of questions to be answered so only first 4 has been answered.