Question

Jones Products manufactures and sells to wholesalers approximately 200,000 packages per year of underwater markers at $3.87 per package. Annual costs for the production and sale of this quantity are shown in the table. Direct materials Direct labor Overhead Selling expenses Administrative expenses Total costs and expenses $256,000 64,000 192,000 80,000 53,000 $645,000 A new wholesaler has offered to buy 33,000 packages for $3.43 each. These markers would be marketed under the wholesaler's name and would not affect Jones Products' sales through its normal channels. A study of the costs of this additional business reveals the following: • Direct materials costs are 100% variable. • Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require overtime pay at 1/2 times the usual labor rate. • 25% of the normal annual overhead costs are fixed at any production level from 150,000 to 300,000 units. The remaining 75% of the annual overhead cost is variable with volume. • Accepting the new business would involve no additional selling expenses. • Accepting the new business would increase administrative expenses by a $2,000 fixed amount.

Answer 1

			per unit amount		total
			normal volume	New business	normal volume	new business	combined
sales			3.87	3.43	774000	113190	887190
variable costs:
direct material			1.28	1.28	256000	42240	298240
direct labor			0.32	0.48	64000	15840	79840
variable overhead			0.72	0.72	144000	23760	167760
total variable costs			2.32	2.48	464000	81840	545840
contribution margin			1.55	0.95	310000	31350	341350
Fixed costs
fixed overhead					48000		48000
administrative expenses					53000	2000	55000
selling expenses					80000		80000
Total fixed expenses					181000	2000	183000
Operating income					129000	29350	158350
working
Direct labor per unit normal			0.32
new business (0.32*1.5)			0.48
Varibale overhead normal = 192000/200000 = 0.96*75% = 0.72
fixed overhead = 192000*25% = 48000

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