Question

Alton Inc. is working at full production capacity producing 35,000 units of a unique product. Manufacturing costs per unit for the product are as follows: Direct materials $11 Direct labor 10 Manufacturing overhead Total manufacturing cost per unit 12 $33 The per-unit manufacturing overhead cost is based on a $4 variable cost per unit and $280,000 fixed costs. The nonmanufacturing costs, all variable, are $10 per unit, and the sales price is $50 per unit. Sports Headquarters Company (SHC) has asked Alton to produce 7,500 units of a modification of the new product. This modification would require the same manufacturing processes. However, because of the nature of the proposed sale, the estimated nonmanufacturing costs per unit are only $5 (not $10). Alton would sell the modified product to SHC for $35 per unit. Required 1-a. Calculate the contribution margin for 7,500 units for both the current and special order. 1-b. Should Alton produce the special order for SHC? 2. Suppose that Alton Inc. had been working at less than full capacity to produce 29,500 units of the product when SHC made the offer. What is the minimum price per unit that Alton should accept for the modified product under these conditions? Complete this question by entering your answers in the tabs below. Req 2 Req 1A Req 1B Calculate the contribution margin for 7,500 units for both the current and special order. Contribution Margin Current Special order

Answer 1

1a.

	Current	Special Order
Sales	50	35
Less: Direct material	11	11
Direct Labor	10	10
Variable manufacturing overhead	4	4
Non manufacturing variable overhead	10	5
Contribution Margin per unit	$15	$5
Units	7500	7500
Contribution Margin	$112,500	$37,500

1b. No, Alton should not produce the special order for SHC.

2. Minimum price = Variable cost per unit + Contribution lost on normal production - Saving in Non manufacturing variable overhead   

= (11+10+4+5) + (7500-5500)*(15 - 5) / 7500-

= $32.67