Question

Rutro Corp. produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 60,000 units per month is as follows: Direct material $74.00 Direct labor 20.00 Variable manufacturing overhead 6.00 Fixed manufacturing overhead 21.00 Variable selling and administrative expense 8.00 Fixed selling and administrative expense 19.00 Total $148.00 The normal selling price of the product is $173.00 per unit. An order has been received from an overseas customer for 11,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $6.00 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. Required:

Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $136.00 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

Suppose the company is already operating at capacity when the special order is received from the overseas customer. You bought the textbook for this course and actually opened it up and read some of the words in it. Thus, you know that “opportunity cost” is the potential benefit given up when one opportunity is selected over another. So, how much do you calculate the opportunity cost of each unit delivered to the overseas customer would be?

Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 11,000 units for regular customers.

What would be the minimum acceptable price per unit for the special order? What is the advantage(s) to Rutro Corp. of the foregoing manufacture of the product for sales by Rutro and instead of manufacturing for sales by other companies? What are the dangers of implementing this strategy?

Answer 1

Company producing and Sales leval	60000 units PM
Particulars	$ per unit
Direct Material	74
Direct Labour	20
Variable Manufacturing Ovear Head	6
Variable selling adminstrative Expenses	8
Total variable cost per unit	108
Fixed Manufaturing Ovear Head-$21*60000 units	$1260000
Fixed selling and administrative Ovear head-$19*60000 units	$1140000
Total Fixed Cost	$2400000
Selling Price per unit	$ 173
Contribution per unit (Selling price per unit-Total variable cost per unit)	$173-$108=$65
Normal Leval	At 60000 Units
Total Varible cost(No of units * Total variable cost per unit)	60000 units*$108= $6480000
Fixed Manufaturing Ovear Head	$1260000
Fixed selling and administrative Ovear head	$1140000
Total Cost	$8880000
Sales (No of units* Selling Price)	60000 units * $173 =$10380000
Profit = Sales-Total Cost	$10380000-$8880000=$1500000
In case Of Idle capacity for 11000 units	11000 Units
Sale price	$136*11000units=$1496000
Total Cost	$106*11000=$1166000
Contribution (Sales-Total cost)	$1496000-$1166000=$330000
Increase Income $ 330000,Fixed cost will not effect income
Customer Requirement -11000 units-In case of No idle capacity
Particulars	$ per unit
Direct Material	74
Direct Labour	20
Variable Manufacturing Ovear Head	6
Variable selling adminstrative Expenses	6
Total variable cost per unit	106
Selling Price per unit	$136
Contribution per unit (Selling price per unit-Total variable cost per unit)	$136-$106=$30
If Company produce and sales at normal leval Contribution per unit = $65
If company accept Ovearseas customer order Contribution Per Unit=$30 there is a opportunity cost per unit = $65
Fixed cost will not change at any leval it will be the same.
Minimum acceptable price for 11000 units at No idle Capacity
Contribution per unit at normal leval (opportunity cost)	$65
Direct Material	$74
Direct Labour	$20
Variable Mnufacturing Ovear Head	$6
Variable selling adminstative Expenses per unit	$6
Selling Price per unit	$171
Minium selling price per unit is $ 171 for special order
Incase company has idle capacity they can accept special order.No idle capacity if company accept special order company will be in loss position
Danager strategy for rutro corp if company accept special order in case of no idle capacity that will effect financial position of the company