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Particulars | Details | Amount | Price per unit | ||
No. of units produced | 30,000.00 | 30,000.00 | |||
Sell price per unit | 55.00 | A | |||
Direct Material | 750,000.00 | 25.00 | |||
Direct Labor | 180,000.00 | 6.00 | |||
Variable Manufacturing overhead | 90,000.00 | 3.00 | |||
Variable selling expense | 120,000.00 | 4.00 | C | ||
Total Variable cost per unit | 38.00 | ||||
Contribution per unit | 17.00 | G | |||
Fixed Manufacturing overhead | 210,000.00 | 7.00 | |||
Fixed selling expense | 180,000.00 | 6.00 | |||
Total Fixed cost per unit | 13.00 | ||||
Current Scenario | |||||
Units Sold | 21,000.00 | ||||
Contribution earned | 357,000.00 | 21,000*17 | |||
Less: | |||||
Fixed Manufacturing overhead | 210,000.00 | ||||
Fixed selling expense | 180,000.00 | ||||
Net Profit | (33,000.00) | ||||
Situation 1- Offer of Retail Chain | |||||
Reduction in Sell price by | 16% | ||||
Reduction in Sell price per unit | 8.80 | B=A*16% | |||
Reduction in Variable selling expense | 75% | ||||
Reduction in Variable selling expense | 3.00 | D=C*75% | |||
Revised Sell price per unit | 46.20 | E=A-B | |||
Less: | |||||
Direct Material | 25.00 | ||||
Direct Labor | 6.00 | ||||
Variable Manufacturing overhead | 3.00 | ||||
Variable selling expense | 1.00 | F=C-D | |||
Total Variable cost per unit | 35.00 | ||||
Contribution per unit | 11.20 | ||||
No. of Units | 9,000.00 | ||||
Total Contribution | 100,800.00 | ||||
Less: Cost of special machine | 18,000.00 | ||||
Net income | 82,800.00 | ||||
Conclusion: By selling the remaining 9,000 units JL Company can earn an additional profit $ 82,800. So they should accept this project. | |||||
Note: Fixed manufacturing and selling expenses are sunk cost and they should not be considered for this order. | |||||
Situation 2- US Army | |||||
Fixed Fee per unit | 1.80 | ||||
Fixed manufacturing overhead per unit | 7.00 | ||||
Net received per unit | 8.80 | ||||
No. of Units | 9,000.00 | 5000*8.8 | |||
Total received | 79,200.00 | ||||
Conclusion: By selling the remaining 9,000 units to US army JL Company can earn an additional profit $ 79,200. So they should accept this project. | |||||
Situation 3- US Army | |||||
Particulars | Sales through regular channel | Provincial Government | |||
Units Sold | 30,000.00 | 21,000.00 | H | ||
Contribution earned | 510,000.00 | 357,000.00 | I=H*G | ||
Less: | |||||
Fixed Manufacturing overhead | 210,000.00 | 210,000.00 | |||
Fixed selling expense | 180,000.00 | 180,000.00 | |||
Net Income | 120,000.00 | (33,000.00) | |||
Add: Total received from US Army | 79,200.00 | Calculated in Situation 2 above | |||
Net Profit | 120,000.00 | 46,200.00 | |||
Variance | 73,800.00 | ||||
Conclusion: If JL company is able to sell all its units through regular channel then it should not sell to US Army. Because it will earn $ 73,800 less if it will sell to US Army. |
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