Question

DAMO manufactures two units, DOORS and WINDOWS for which the following information is available:

Costs per unit Direct materials Direct labor Variable overhead Fixed overhead Total cost per unit Price Units sold

DOORS $   450 600 750 600 $2,400 $3,000 400

WINDAWS $   550 750 900 750 $2,950 $3,900 200

                                                                                                                                                                                                                                                                                   

            The average wage rate is $20 per hour. The plant has a capacity of 21,000 direct labor hours, but current production uses only 19,500 direct labor hours.

Required:

1. A new customer has offered to buy 40 units of 6 if the price is lowered to $3,000 per unit. How many direct labor hours are required to produce 40 units of WINDOWS? How much will the profit increase (or decrease) if DAMO accepts this proposal? All other prices will remain the same.

2. Suppose that the customer has instead offered to buy 60 units of WINDOWS at $3,000 per unit. How much will the profits change if the order is accepted? Assume that the company cannot increase its production capacity to meet the extra demand.

3. Answer the question in requirement (2), assuming instead that the plant can work overtime. Direct labor costs for the overtime production increase to $30 per hour, i.e., variable overhead cost for overtime production are 50% more than for normal production.

Answer 1

Answer 2

Answer 3