Question

1. WuTang LTD produces a single product with sales of 40,000 units and has the following unit costs:

Direct materials	$16
Direct labor	$7
Variable overhead	$7
Fixed overhead	$10*

*Based on total fixed overhead of $400,000 and units produced of 40,000.

For the coming period, Bonovich has received an offer of a government contract of 10,000 units. The contract specifies a payment of $32 per unit plus a fee of $20,000 for the contract. The company's normal selling price is $40 per unit.

a.    Assume that, if the contract is accepted, regular production and sales will be unaffected, and no alternative uses of the productive capacity will be foregone. Show whether the government contract should be accepted.

b.    Assume that normal production will be decreased by one unit for every unit manufactured to fill the contract. Show whether, under these revised circumstances, the government contract should be accepted. Explain briefly in terms of opportunity costs.

Answer 1

oli If the Contract is accepted & Regular Salet Production Unaffected. - Income Statement Uncler Marginal Costing. Particulars I Amoun . Sale's $1940,000 Less: Variable Costs - - Direct Materiaal $ 800,000 - Direct Labour $ 350,000 - Variable Overhead $ 350,000 $(1500,000) $ 440,000 Less. Fixed Cost $(4.00.000) Profit /Closs) $ 40,000 Contribution

Working Note: Salle's Regular production t Government Coulreick = 40,000 Unitx$ 40 ) +(10,000 vuitx$32+ $20,000) : $ 1600,000+ ($320,000+ $20,000) = $1,600,000 + $ 346,000 E $1940,000 Variable Cost's Direct Matericul = 40,000 x $16 + 10,000 X $16 = $640,000 + $ 160,000 = $ 800,000 --- Direct labour = 40,000 % $7 + 10,000 x $7 = $280,000 + $70,000 = $350,000 Variable Overhead - 40,000x$7 + 16,000$7. = $280,000+ $70,000 - $ 350,000 T(All of Above are because of Regular Production and Government Contract Run's together

Sol(b) If Normal production will be decreased by one unit for every Unit Manufactured to fill the Contrack. Income Statement Under Marginal Costing Particulars. Amount Sales $ 1,540,000 Teserot Variabile Cost's Direel Malexical $ 640,000 - Direct Labour $ 280,000 - Variable Overhead $ 280,000 $(1200poo) Contribution. $ 340,000 Less : fixed Overhead 1$ (400,000) _Profit /(loss) $60,000) Decision :- In the Circumstance (a) the Company - Malue a lorofit of $ 40,000, if the Compants normal production and Government Contract runs together. In Case (b) if the Company accept the Government Contract than the Companys normal Production decreases as well as the Company fill the Contract and also make a loss of $60,000 - Tham the decision is - Accept Case (a) where there the Normal production of Company and Government Contract Run's together ng

Working Note: If the Company accept the Government Contract them the production of Company will be decreased Toy One Unit for every Unit manufactured to fill the Contract- than the Companys Production - 40,000 - 10,000 _ 30,000 Unit Sale's e Company's production + Government Contracta = (30000 Quitx $40)+(10,000 vuitx$32+ $20,000) = $1,200.000+($ 320,000+ $20,000) = $1,200,000+ $340,000 $ 1,540,000 Variable costs. * Direct Material = 30,000 Unit X$16+ 10000 unitx $16 = $.480.000 + $ 160,000 - $ 640,000 Direct labour 5 30,000 unit X $7+ 10,00Dumex $7 - $ 210,000+ $70,000 .. $280,000 Variable Overhead = 30,000 Vuitx $7+ 10,000vuit *$7 = $210,000 + $70,000. .= $280.000 -- --