Question

Ovation Company has a single product called a Bit. The company normally produces and sells 38,400 Bits each year at a selling price of $36 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	11.10
Direct labour		4.20
Variable manufacturing overhead		3.00
Fixed manufacturing overhead		4.50	($172,800 total)
Variable selling expenses		3.30
Fixed selling expenses		4.20	($161,280 total)
Total cost per unit	$	30.30

     A number of questions relating to the production and sale of Bits follow. Each question is independent.

4. Due to a strike in its supplier’s plant, Ovation Company is unable to purchase more material for the production of Bits. The strike is expected to last for two months. Ovation Company has enough material on hand to operate at 30% of normal levels for the two-month period. As an alternative, Ovation could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? (Input the amount as a positive value. Do not round your intermediate calculations.)

5. An outside manufacturer has offered to produce Bits and ship them directly to Ovation’s customers. If Ovation Company accepts this offer, the facilities that it uses to produce Bits would be idle; however, fixed manufacturing overhead costs would be reduced by 70%. Since the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their current amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer. (Do not round your intermediate calculations. Round your answer to 2 decimal places.)

Answer 1