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PROBLEM #1 SPECIAL ORDER
Parker and Spitzer Manufacturing is approached by a European customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The following per unit data apply for sales to regular customers:
Direct materials $66
Direct labor 30
Variable manufacturing support 48
Fixed manufacturing support 104
Total manufacturing costs 248
Markup (50%) 124
Targeted selling price $372
Parker and Spitzer Manufacturing has excess capacity.
- What is the full cost of the product per unit?
- What is the contribution margin per unit?
- Which costs are relevant for making the decision regarding this one-time-only special order? Why?
- For Parker and Spitzer Manufacturing, what is the minimum acceptable price of this one-time-only special order?
- For this one-time-only special order, should Parker and Spitzer Manufacturing consider a price of $200 per unit? Why or why not?
PROBLEM #2 SCARCE RESOURCES
25) Ralph’s Mufflers manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:
Model X Model Y Model Z
Selling price $160 $180 $200
Direct materials 60 60 60
Direct labor ($20 per hour) 30 30 40
Variable support costs ($10 per machine-hour) 10 20 20
Fixed support costs 40 40 40
- For each model, compute the contribution margin per unit.
- For each model, compute the contribution margin per machine-hour.
- If there is excess capacity, which model is the most profitable to produce? Why?
- If there is a machine breakdown, which model is the most profitable to produce? Why?
- How can Ralph encourage her sales people to promote the more profitable model?
PROBLEM #3 MAKE-BUY
Kirkland Company manufactures a part for use in its production of hats. When 10,000 items are produced, the costs per unit are:
Direct materials $0.60
Direct manufacturing labor 3.00
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 1.60
Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.
- What is the relevant per unit cost for the original part?
- Which alternative is best for Kirkland Company? By how much?
PROBLEM #4 COST-PLUS PRICING
Backwoods Incorporated manufactures rustic furniture. The cost accounting system estimates manufacturing costs to be $80 per table, consisting of 70% variable costs and 30% fixed costs. The company has surplus capacity available. It is Backwoods’ policy to add a 50% markup to full costs.
- Backwoods Incorporated is invited to bid on an order to supply 100 rustic tables. What is the lowest price Backwoods should bid on this one-time-only special order?
- A large hotel chain is currently expanding and has decided to decorate all new hotels using the rustic style. Backwoods Incorporated is invited to submit a bid to the hotel chain. What is the lowest price per unit Backwoods should bid on this long-term order?