Question

Bridge and Co. manufactures a single product with the following cost structure (in $ per unit):

Materials 6.25

Variable Overhead 0.55

Variable Labour 3.55

Fixed manufacturing overhead 3.00

Total manufactured cost 13.35

For 2017, the budgeted volume is 800,000 units. Fixed marketing and selling costs are budgeted

at $1,600,000. Sales in the Canadian market are made at $18.00 each. Delivery costs in the

Canadian market average $0.20 per unit. Bridge has been informed that two major customers will

not be renewing their contracts for the 2017 year, with the result that sales are only expected to

reach 640,000 units. The company’s manufacturing capacity is limited to 800,000 units per

annum. Management is considering two alternatives to make up the sales shortfall in 2017:

• Sell an export order of 160,000 units to New Zealand priced at $15.50 per unit. The cost of

shipping the order amounts to $60,000. Bridge has appointed an agent in Wellington and

expects to pay an 8% commission on the value of the contract.

• Sell an order of 160,000 units to the Canadian Federal government that is subject to a

pricing formula that has the Canadian government paying Bridge & Co for the variable

manufacturing costs, the government’s share of fixed manufacturing overhead and a fixed

fee of $75,000.

Required

(a) Determine which contract is the most advantageous to Bridge. Provide complete

calculations to support your conclusions.

(b) Determine Bridge’s net income/(loss) before taxes for 2017 assuming that the company

proceeds with the most advantageous order in (a) above.

(c) Identify the decision-making steps Bridge and Co.’s management would take when

Answer 1