Question

Check my work Alton Inc. is working at full production capacity producing 34,000 units of a unique product. Manufacturing costs per unit for the product are as follows: 0.31 points Direct materials Direct labor Manufacturing overhead Total manufacturing cost per unit $10 9 11 $30 eBook References The per-unit manufacturing overhead cost is based on a $6 variable cost per unit and $170,000 fixed costs. The nonmanufacturing costs, all variable, are $8 per unit, and the sales price is $55 per unit. Sports Headquarters Company (SHC) has asked Alton to produce 6,000 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 $4 (not $8). Alton would sell the modified product to SHC for $40 per unit. Required 1-a. Calculate the contribution margin for 6,000 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 28,600 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?

Answer 1

Current Contribution Margin Amount ($) Amount ($) Particulars Sales 55 Less: Direct Materials 10 Direct Labour Manufacturing Ovhd (Variable) 6 Non Manufacturing Ohd 8 33 Contribution per unit 22 Special Order- Contribution Margin Particulars Amount ($) Amount ($) Sales Less: Direct Materials 10 Direct Labour 9 Manufacturing Ovhd (Variable) 6 Non Manufacturing Ohd 4 Contribution per unit 11 6000 units x $22 1-a. Contribution Margin for 6000 units (Current)= $ 1,32,000 Contribution Margin for 6000 units (Special) 6000 units x $11 S 66,000 1-b. There is a loss of $132000-$66000,i.e $66,000 in accepting the Special oder fot SHC, Thus Special Order should be not be accepted Should Alton produce the special order for SHC? NO 40 29 O O LO 00

Solution 2. If alton working at less capacity Full Capacity 34,000 units 28,600 units Less: Capacity utilisation Spare capacity 5,400 units Special order is of 6000 units, hence 600 units from current production will be sacrificed Computation of Minimum price, if order is accepted $ Variable costs on special order= 29 per unit No of units to be produced 6000 units $ Product 1,74,000 Add: Contribution lost on 600 units x $22 $ 13,200 Total Minimum Price required 1,87,200 Minimum price per unit ($187200 / 6000 units) $ 31.20

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