Question

Alton Inc. is working at full production capacity producing 37,000 units of a unique product. Manufacturing costs per unit for the product are as follows: Direct materials Direct labor Manufacturing overhead Total manufacturing cost per unit The per-unit manufacturing overhead cost is based on a $6 variable cost per unit and $111,000 fixed costs. The nonmanufacturing costs, all variable, are $6 per unit, and the sales price is $65 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 $3 (not $6). Alton would sell the modified product to SHC for $50 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 31,300 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 is not complete, Complete this question by entering your answers in the tabs below. Reg 1A Reg 1B Reg 2 Calculate the contribution margin for 6,000 units for both the current and special order. Contribution Margin Current S 111.111 X

Answer 1

Answer 1 (a)

Calculation of Contribution Margin

	Current Level	Special Order
Selling Price per unit	$ 65	$50
Less: Variable Costs:
Direct Material	8	8
Direct Labor	7	7
Manufacturing overhead	6	6
Non MOH (all Variable)	6	3
Total Variable Costs	27	24
Contribution Margin (a)	38	26
Contribution Margin for 6,000 units	$ 228,000	$ 156,000

Answer 1(B) Alton Inc. should not accept the order due to the following reasons.

(i) The Contribution Margin in special order ($26) is less than current level or existing level contribution Margin $38.

(ii) Alton Inc. is already operating at its full capacity level 37,000 units and

(iii) Alton Inc must take care of the demand of its existing customer/ market share.

Answer 2. If Alton Inc. operate at 31,300 units less than its present full capacity level 37,000 units. It has a spare capacity of 6,300 units. Alton should accept the order, when the minimum price not less than its variable costs $24.This means that if the price is say $ 25 or $26 or More. Alton inc. would maximize its total profits margin on every single unit sold on excess price over $24.