Question

The Bytown Company produces one product. The cost of producing and selling a single unit of this product at the company's normal activity level of 70,000 units per month is as follows:

           

Direct Materials	$29.60
Direct Labour	$ 5.80
Variable Manufacturing Overhead	$ 2.50
Fixed Manufacturing Overhead	$17.20
Variable Selling & Administrative Expense	$ 1.80
Fixed Selling & Administrative Expense	$ 6.70

            The normal selling price of the product is $72.90 per unit.

           

An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.10 less per unit on this order than on normal sales.

           

Direct labour is a variable cost in this company.

           

Required:

1. Suppose there is ample idle capacity to produce the units required by the overseas customer, and the special discounted price on the special order is $66.10 per unit. By how much would this special order increase (decrease) the company's operating income for the month?

2. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

c) Suppose there is not enough idle capacity to produce all of the units for the overseas customer, and accepting the special order would require cutting back on production of 1,300 units for regular customers. What would be the minimum acceptable price per unit for the special order?

           

> Where did you the 39.7?

Answer 1

Bytown Company Requirement a Differential Revenues Selling price ($66.10 x 3000 units) 198300 Differential Costs Direct Material ($29.60 x 3000 units) Direct Labor ($5.80 x 3000 units) Variable Manufacturing Overhead ($2.50 x 3000 units) Variable Selling & Admin [($1.80- $1.10) x 3000 units] 88800 17400 7500 2100 Total Differential Costs 115800 Increase in profits ($198,300-115,800) 82500 Requirement b Selling 2000 units to the overseas customer nets companies the $82,500 we solved for in Part A. We need to compare this to the profits from selling 3000 regular units. Differential Revenues Selling Price ($72.90 x 3000 units) 218700 Differential Costs Direct Material ($29.60 x 3000 units) 88800 Direct Labor ($5.80 x 3000 units) 17400 Variable Manufacturing Overhead ($2.50 x 3000 units) Variable Selling $ Admin ($1.80 x 3000 units) 7500 5400 Total Differential Costs 119100 Profits from Selling 3000 regular units 99600 Profits decrease by ($99,600 $82,500) $17,100 Since the company makes more from selling 2000 regular units than they make from selling the 3000 special units, they should not make the sale. Requirement c The opportunity cost is just the contribution margin on normal sales: Normal selling price per unit 72.9 Variable cost per unit on normal sales 39.7 Unit contribution margin on normal sales 33.2 Minimum acceptable price: Unit contribution margin on normal sales 33.2 Displaced normal sales 1300 Lost contribution margin displaced sales Total variable cost on special order 43160 115800 Total Incremental cost of special order 158960 Number of units in special order 3000 Minimum acceptable price on special order 52.99