Question

The Indigo Girls Company has the capacity to produce 90,000 units per year. Normal production and sales are 75,000 units per year. The normal selling price is $15 per unit. At the 75,000 unit level of activity, unit costs are as follows:

Direct material $2.25 per unit Variable Overhead $1.50 per unit Fixed Overhead $2.00 per unit ($150,000 total)

Direct Labor $1.75 per unit Variable Selling $1.00 per unit Fixed Selling $1.20 per unit ($80,000 total)

A special one-time customer would like to buy 10,000 units from the Indigo Girls. This order would not affect normal sales. However, there would be added fixed costs of $25,000 specifically caused by this order. There would be no variable selling expenses incurred on this order.

Again refer to the original information in question 21. One of the regular customers, the Backstreet Boys, normally purchases 5,000 units from the Indigo Girls. The Backstreet Boys have decided that instead of the regular 5,000 units, they want 10,000 units of a different product. To make this different product would not affect the fixed costs of the Indigo Girls, but the variable costs of the different product (including variable selliing expense) would be $10.00 per unit. At what selling price would be Indigo Girls be indifferent between selling 5,000 units of the regular product compared to 10,000 units of the different product?

Answer 1

Sold 5000 regular product :-

Units sold * (SP – DM – DL – Variable overhead – Variable selling)

5000 * (SP - $2.25 - $1.75 - $1.50 - $1)

Sold 1000 units of different product :-

Units sold * (SP – variable cost)

10000 * (SP - $10)

At indifference point :-

Sold 5000 regular product = Sold 1000 units of different product

5000 * (SP - $2.25 - $1.75 - $1.50 - $1) = 10000 * (SP - $10)

5000 * (SP - $6.50) = 10000 * (SP - $10)

5000 SP - $32500 = 10000 SP - $100000

$67500 = 5000 SP

SP = $13.50