Question

Parsley Company has a single product called a Dak. The company normally produces and sells 81,000 Daks each year at a selling price of $56 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	7.50
Direct labor		10.00
Variable manufacturing overhead		2.50
Fixed manufacturing overhead		10.00	($810,000 total)
Variable selling expenses		2.70
Fixed selling expenses		2.50	($202,500 total)
Total cost per unit	$	35.20

1a.

Assume that Parsley Company has sufficient capacity to produce 109,350 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 81,000 units each year if it were willing to increase the fixed selling expenses by $130,000. What is the financial advantage (disadvantage) of investing an additional $130,000 in fixed selling expenses?

advantage or disadvantage by ______________

1b. Assume again that Parsley Company has sufficient capacity to produce 109,350 Daks each year. A customer in a foreign market wants to purchase 28,350 Daks. If Parsley accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $22,680 for permits and licenses. The only selling costs that would be associated with the order would be $2.60 per unit shipping cost. What is the break-even price per unit on this order? (Round your answers to 2 decimal places.)

1c. The company has 700 Daks on hand that have some irregularities and are therefore considered to be "seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What is the unit cost figure that is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.)

Answer 1

1a:

Computation of Contribution Margin per unit
Selling price per unit		56.00
Less: variable expenses:
Direct materials	7.50
Direct labor	10.00
Variable manufacturing Overhead	2.50
Variable selling expense	2.70	22.70
Contribution margin per unit		33.30
Increased Sales In units (81000*35%)	28350
Contribution margin per unit	$33.30
Incremental Contribution margin	$9,44,055.00
Less: Additional Fixed selling expense	$1,30,000.00
Financial advantage	$8,14,055.00

1b:

Variable Manufacturing Cost per unit	$20.00
Import Duties per unit	$3.70
Permits and licenses ($22680/28350)	$0.80
Shipping cost per unit	$2.60
Break even price per unit	$27.10

1c:

Relevant unit cost (Variable selling expenses)

$2.70