Question

            

Problem #1

            

The Production Division produces and sells 150,000 toy pianos. Maximum capacity is 200,000 toy pianos.

The unit cost of manufacturing one toy piano is as follows (for 150,000 pianos):

Direct materials                       $10

Direct labor                                 2

Variable overhead                       3

Fixed overhead                           5

Total cost                                $20

Other costs incurred by the Production Division are as follows:

Total fixed selling and administrative            expenses         $500,000

Variable selling                                                           $1 per unit

                                    

Currently, the Production Division is selling toy pianos to external customers for $29.

The Special Order Customer wants to buy 50,000 toy pianos. The variable selling expenses are avoided if the toy pianos are sold to the Special Order Customer.

Required:

1.   Assume that the Production division is capable of producing 200,000 toy pianos per year (so, it has extra capacity to produce additional 50,000 units).  What is the minimum amount that the Production Division should accept for the special order?

2. What is net operating income of the Production Division if they accept the special order price of $20?

3. Now, consider all the original facts but assume that the Production Division is already operating at full capacity (that means, they are making and selling 200,000 pianos).  What is the minimum amount the Production Division should accept for the special order?

Problem #2

The Milk Inc. has the following operating results for making 150,000 pounds of chocolate:

Total Sales                              $60,000

Total Variable expense            37,500
Total Fixed Expenses             12,000

Net operating Income             10,500

The Milk Chocolate Division has the ability to produce and sell 200,000 pounds of chocolate annually. Assume that The Peanut Butter Inc. wants to purchase 60,000 pounds of chocolate from The Milk Inc. Under these conditions, what amount per pound of chocolate would The Milk Inc. have to charge the Peanut Butter Inc. for this special order in order to maintain its current net operating income? Round your answer to 2 decimals.

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Answer 1

Answer :

Problem #1

1(a) If there is spare capacity ,then for any sales that are made by using that spare capacity ,the opprtunity cost is nil.

So minimum price for special order = Marginal cost

= $10+ $2+ $3

   = $15 per toy

1(b) Net operating income of production division = ($20- $15)*50000

   = $250000

1(c) If there is no spare capacity ,

Minimum price for special order = marginal cost (variable cost ) + opportunity cost

= $15 + ($29 - $15 +$1)

   = $ 28

Problem #2

selling price in order to maintain current profit

= (Variable cost + Opportunity cost for 10000 pound .. ie contribution lost on 10000 pound of chocolate)/60000

= (60000*0.25 + 10000*0.15)/60000

= ($15000 + $1500)/60000

= $16500/60000

= $0.275 per pound

working note -1

variable cost per unit = 37500/150000 = 0.25 per pound

contribution per unit = (60000 -37500)/150000 = 0.15 per pound