Question

1. The Young Company has gathered the following information for a unit of its most popular product

Direct materials	$	12
Direct labor		6
Overhead (40% variable)		10
Cost to manufacture		28
Desired markup (50%)		14
Target selling price	$	42

The above cost information is based on 10,000 units. A distributor has offered to buy 2,000 units at a price of $32 per unit. The distributor claims this special order would not disturb regular sales at $42. Special packaging and other selling expenses would be an additional $0.50 per unit for the special order. How many units of regular sales could be lost before this contract is not profitable?

a. 1,000 units.

b. 950 units.

c. 2,000 units.

d. 0 units.

2. Artis Sales has two store locations. Store A has fixed costs of $125,000 per month and a variable cost ratio of 60%. Store B has fixed costs of $200,000 per month and a variable cost ratio of 30%. At what sales volume would the two stores have equal profits or losses?

a. $325,000.

b. $250,000.

c. Cannot determine with the information given.

d. $361,111.

Answer 1

1) Contribution Margin on Selling 2000 units at $32 per unit :-

= ($32 - $12 - $6 - $4 - $0.50)*2000

= $9.5 * 2000

= $19000

Contribution Margin Per unit in Ragular Sales :-

= $42 - $12 - $6 - $4

= $20

Units of Ragular Sales that could be lost before this contract is not profitable :-

= $19000 / $20

= 950 units

The Answer is "B"

2) The Answer is "B"

B. $250000

Store A = $250000 - (60% * $250000) - $125000 = ($25000)

Store B = $250000 - (30% * $25000) - $200000 = ($25000)