Question

16sb
Please show full calculation, TIA!
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1.
ABC Company produces a product that currently sells for $72 per unit.

Current production costs per unit include the following:
Direct materials = $20                         Variable overhead = $10
Direct labor = $24                                  Fixed overhead = $10
Total production costs = $64

ABC has received a special pricing offer from a nonprofit organization to buy 3,000 units at $60 per unit.

ABC is currently operating at full production capacity.

Identify the following relevant costs of this special pricing offer:
i. Current contribution margin at full capacity =
ii. Contribution margin of special pricing offer =
iii. Difference in contribution margin =
iv. Should the special pricing offer be accepted? Yes or No

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2.
ACB Company sells Product X for $20 per unit, but if the product is enhanced, it can be sold for $26 per unit.

The enhancement process will cost $80,000 for the 10,000 units that are currently sold.

If sales of Product X remain the same, identify the following relevant costs to process further:
i. Difference in selling price =
ii. Difference in processing costs =
iii. Difference in profit/(loss) =
iv. Based on the relevant costs information identified above, should ACB Company sell Product X as-is or process further? Decision to process further = Yes or No

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3.
ACB Company sells Product X for $20 per unit, but if the product is enhanced, it can be sold for $26 per unit.
The enhancement process will cost $80,000 for the 10,000 units that are currently sold.

If sales of Product X remain the same, identify the following relevant costs to process further:
i. Difference in selling price =
ii. Difference in processing costs =
iii. Difference in profit/(loss) =
v. Based on the relevant costs information identified above, should ACB Company sell Product X as-is or process further? Decision to process further = Yes or No

Answer 1

1.

i. Current contribution margin at full capacity = Sales - variable costs

Current contribution margin at full capacity = $72 - 54 (20+24+10) = $18

ii. Contribution margin of special pricing offer = $60 - 54 = $6

iii. Difference in contribution margin = $12 ($18-6)

iv. No, the special pricing offer should not be accepted.

2.

i. Difference in selling price = $60,000 (10,000*$6 ($26-20)

ii. Difference in processing costs = $80,000

iii. Difference in profit / (loss) = $(20,000)

iv. Decision to process further = No

3.

i. Difference in selling price = $60,000 (10,000*$6 ($26-20)

ii. Difference in processing costs = $80,000

iii. Difference in profit / (loss) = $(20,000)

v. Decision to process further = No