Question

8 Problem 110ppartunity Costs (H. Schaefer)( ' Cnn product, Rosebo. Manyfacturingucosts per unit for Rosebo follow: orp. is working at full production capacity producing 10,000 units of a unique 20 Direct materials Direct manufacturing lab Manufacturing overhead The unit manufacturing overhead cost is based on a variable cost per unit of $2 and fixed costs of $30,000 (at full capacity of 10,000 units). The nonmanufacturtng costs, all variable, are $4 per unit, and the selling price is $20 per unit. A customer, the Miami Co., has asked Wolverine to produce 2,000 units of a modification of Rosebo to be called Orangebo. Orangebo would require the same manufacturing processes as Rosebo, and the Miami Co. has offered to share equally the nonmanufacturing costs with Wolverine. Orangebo will sell at $15 per unit. Required 1. What is the opportunity cost to Wolverine of producing the 2,000 units of Orangebo? brre.ML 2. The Buckeye Corp. has offered to produce 2,000 units of Ros r Wolverine so that Wolverine may accept the Orangebo offer. Buckeye would 'chargd Wolverine $14 per unit for the Rosebo. Should Wolverine accept the Buckeye offer? (Show your calculations) wnmun 3. Suppose Wolverine had been working at less than full capacity, producing 8,000 units of Rosebo at the time the Orangebo offer was made, What is the mjnimum price Wolverine should S accept for Orangebo under these conditions?

Answer 1

1) The opportunity cost is $18,000

Working:

Selling price		20
Variable costs per unit:
Direct materials	2
Direct manufacturing labour	3
Variable manufacturing overhead	2
Variable marketing costs	4	11
Contribution margin per unit		9
Contribution margin for 2,000 units		18,000

Opportunity cost refers to maximum contribution to operating income which is forgone by not utilizing a limited resource in its next-best alternative use

2)

	Manufacture Orangeb	Purchase Rosebo	Total
Selling price	15	20
Variable costs per unit:
Purchase costs		14
Direct materials	2
Direct manufacturing labour	3
Variable manufacturing overhead	2
Variable marketing costs	2	4
Variable costs per unit	9	18
Contribution margin per unit	6	2
Contribution margin from selling 2,000 units	12,000	4,000	16,000
of Orangebo and 2,000 units of Rosebo

　

Accepting the Miami Company and Buckeye offer will cost Wolverine $2,000. It is computed as $16,000 - $18,000 = -$2,000. Thus Wolverine should decline the these offers

3) The minimum price will be $9 (computed in Part-2 as the sum of the incremental costs). This follows because, when Wolverine holds surplus capacity, the opportunity cost will be zero. For the decision in short-run whether to accept Orangebo’s offer, Wolverine's fixed costs will be irrelevant. Only the incremental expenditure will be required to be covered for it to be worthwhile for Wolverine for accepting the Orangebo offer