Question

Alton Inc. is working at full production capacity producing 21,000 units of a unique product. Manufacturing costs per unit for the product are as follows:

Direct materials	$	6
Direct labor		5
Manufacturing overhead		7
Total manufacturing cost per unit	$	18

The per-unit manufacturing overhead cost is based on a $3 variable cost per unit and $84,000 fixed costs. The nonmanufacturing costs, all variable, are $6 per unit, and the sales price is $33 per unit.

Sports Headquarters Company (SHC) has asked Alton to produce 5,200 units of a modification of the new product. This modification would require the same manufacturing processes. However, because of the nature of the proposed sale, the estimated nonmanufacturing costs per unit are only $3 (not $6). Alton would sell the modified product to SHC for $23 per unit.

Required

1-a. Calculate the contribution margin for 5,200 units for both the current and special order.

1-b. Should Alton produce the special order for SHC?

2. Suppose that Alton Inc. had been working at less than full capacity to produce 16,900 units of the product when SHC made the offer. What is the minimum price per unit that Alton should accept for the modified product under these conditions?

Answer 1

1a)contribution margin=sales-variable costs
current order:
contribution margin=33-(6+5+3+6)=13
special order:
contribution margin=23-(6+5+3+3)=16

1b) Revenue from special order= 23*5200=119600
relevant cost to fill special order=5200*(6+5+3+3)=88400
lost sales of exisiting product=13*5200=-67600
impact on operating income =119600-88400-67600=-36400
so do not accept special order as they loose income of 36400

2)the relevant cost to fulfill speical order=6+5+3+3=17
oppurtunity cost:
no units of lost sales=5200-(21000-16900)=1100
contribution margin per unit regular sales=13
no of units special order=5200
=(1100*13)/5200=2.75
minimum acceptable price=17+2.75=19.75