Question

Salisbury Company has the capacity to produce 70,000 units of product but is currently selling only 55000 units at a price of $85 per unit variable cost per unit are as follows.

Direct material $24.60

Direct Labor $11.35

Variable MOH $4.65

Variable Selling $1.80

The company is interested in using its idle capacity and is seeking orders from costumers for which they are willing to accept a reduced price. Gilbert Corporation has requested to buy 16,000 units (all or nothing) for $60,000 each. Gilbert would like some modifications made that would increase the variable manufacturing cost by $3.00 per unit and would require a one-time investment of $21,000 in special molds that would have no salvage value. Variable selling expenses would also continue.

Barry Inc. the new costumer, has also expenses an increase in purchasing the product. Barry would like to buy 20,000 units (all or nothing). These units would require so further modification, and there would be no variable selling expenses. Unfortunately, Salisbury cannot sell to both Gilbert and Berry. What is Sainsbury’s minimum price to accept the offer from the Berry (instead of Gilbert)? (choose the closet number.)

A. $62.15

B. $61.85

C. $59.75

D. $49.10

Answer 1

Solution:

Computation of regular contribution margin per unit
Particulars	Amount
Selling price	$85.00
Variable cost:
Direct material	$24.60
Direct labor	$11.35
Variable MOH	$4.65
Variable Selling	$1.80
Total variable cost	$42.40
Contribution margin per unit	$42.60

Computation of Margin from accepting order of Gilbert corporation
Particulars	Amount
Sales (16000*$60)	$960,000.00
Variable cost [16000 * ($42.40+3)]	$726,400.00
Contribution	$233,600.00
Loss on contribution margin from regular sale (1000*$42.60)	$42,600.00
Investment in special molds	$21,000.00
Net Income from special order	$170,000.00

Variable cost of barry order = 20000 * ($42.40 - $1.80) = $812,000

Loss of regular contribution margin if barry order is accepted = 5000 * $42.60 = $213,000

Loss of income from gilbert corporation if barry order accepted = $170,000

Minimum required revenue in order to accept barry order = $812,000 + $213,000 + $170,000 = $1,195,000

Minimum price to accept the offer from berry = $1,195,000 / 20000 = $59.75 per unit

Hence option C is correct.