Question

1. Litco produces and sells Product 2 with the following revenue and cost information

Sales Revenue per unit		$38
Cost per unit:
Direct Materials	$7
Direct Labor	$2
V. Manu O/H	$3
Fixed Manu O/H	$6
Sales Commissions	$3
Packaging	$1
Total Cost Per Unit		$22
Net Income Per Unit		$16

A new customer in a new sales region offers to buy 1,000 units for $18 per unit.

If this offer is accepted, Litco will pay no sales commissions but packaging costs will increase from $1 to $2 per unit.

Assuming Litco has excess capacity and will not lose any of its current customers, should Litco accept or reject this offer?

	Current Printer	New Model
Original Purchase Cost	$12,500	$24,000
Accumulated Depreciation	$8,900	------
Estimated Operating Costs (Annually)	$11,000	$5,200
Useful Life	6 years	6 years

If sold now, the current printer will have a salvage value of $2,900. If operated for the remainder of its useful life, the current printer will have no salvage. The new printer is expected to have zero salvage after five years.

Should the company retain or replace the printer? (Indicate how net income will differ)

3. It costs Bluff Company $18.20 of variable costs and $7.80 of fixed costs to produce its product that sells for $39. Oz Company, a foreign buyer, offers to purchase 3,000 units at $23.40 each. If this special offer is accepted and produced with unused capacity, net income will:

1. Decrease $7,800
2. Increase $7,800
3. Increase $15,600
4. Increase $11,700

Answer 1

The question is whether to accept new offer of 1000 units by the new customer at $ 18 per unit.

We will be calculating the Contribution per unit of new offer of 1000 units at Selling price of $ 18 per unit.

Contribution = Sales price (-) all variable costs.

Note:Fixed Costs are not to be taken for claculation purpose of new offer because it does not make any difference to the new offer, as it is we are going to incurr the fixed cost whether we accept new offer of 1000 units or not.

Thus for we will calculate the contribution per unit of new offer.

Particulars Amount $ Amount $

1.Sales price per unit for new offer - $18

less:All variable cost

a)direct material cost $7

b)Direct labour cost $2

c)v.Manu o/h $3

d)sales commission (No sales commission for new offer     $0

e)Packaging cost (increase to $2 for new offer) $2

2.Total cost under new offer $14

Contribution per unit under new offer (1-2) $4

Therefore Litco should accept the new offer at $ 18 for 1000 units as it will earn a net profit $4*1000 units = $ 4000.