Question

Barker company has a single product called a Zet. The company normally produces and sells 80,000 Zets each year at a selling price of $40 per unit. The company's unitcosts at this level of activity are given below:
Direct Materials $9.50
Direct Labor $10.00
Variable Manufacturing Overhead $2.80
Fixed Manufacturing Overhead $5.00 ($400,000 Total)
Variable Selling Expenses $1.70
Fixed Selling Expenses $4.50 ($360,000 Total)
Total Cost Per Unit $33.50

The company has 500 Zets on hand that were produced last month and have small blemishes. Due to the blemishes, it will be impossible to sell these units at the normalprice. If the company wishes to sell them through regular distribution channels, what unit cost figure is relevant for setting a minimum selling price? Explain.

Answer 1

If the plant is closed for three months, 70% of fixed manufacturing costs and two-third of the fixed selling expenses would be incurred for the 3 months period.

Fixed manufacturing cost = $400,000 x 3/12 x 70% = $70,000

Fixed selling expenses = $360,000 x 3/12 x 2/3 = $60,000

Therefore, even if the plant is closed, the company will incur costs of $70,000 + $60,000 = $130,000

This $130,000 is a loss for the company if it closes the plant for 3 months peiod.

So to be indifferent between operating during the period of three months or close the plant, the selling price should be such that, loss from producing and selling the product is exactly $130,000

Compute the number of units produced during the 3 months period at 40% of normal capacity.

Normal capacity = 80,000 units per year

Normal capacity for 3 monhs = 80,000 x 3/12 = 20,000

40% of normal capacity for 3 months = 20,000 x 40% = 8,000

Compute the total cost to produce and sell the 8,000 units.

Variable costs of producing and selling 8,000 units = ($9.50 + $10 + $2.80 + $1.7) x 8000 = $192,000

Fixed manufacturing costs if plant is not closed = $400,000 x 3/12 = $100,000

Fixed selling expenses if plant is no closed = $90,000

Total costs of producing and selling 8,000 units = $192,000 + $100,000 + $90,000 = $382,000

Total cost of producing and selling 8000 units is $382,000. To sell at a loss of $130,000 the company must recover $252,000 ($382,000 - $252,000) of the total cost.

To recover $252,000 selling price = $252,000 / 8,000 = $31.5.

If the selling price is $31.50, the company would be indefferent between closing the plant and not closing the plant for the three-month period.

Answer 2

31.5 slaying