Question

Rutkey Collectibles is a small toy company that manufactures and sells metal replicas of classic cars. Each car sells for $3.30 The cost of each unit follows:

Materials	$	0.70
Labor		0.80
Variable overhead		0.30
Fixed overhead ($17,900 per month, 17,900 units per month)		1.00
Total costs per unit	$	2.80

One of Rutkey's regular customers asked the company to fill a special order of 800 units at a selling price of $2.30 per unit. Rutkey's can fill the order using existing capacity without affecting total fixed costs for the month. However, Rutkey's manager was concerned about selling at a price below the $2.80 cost per unit and has asked for your advice.

Required:

a. Prepare a schedule to show the impact of providing the special order of 800 units on Rutkey's profits in addition to the regular production and sales of 17,900 units per month.

b. Based solely on the data given, what is the lowest price per unit at which the model cars could be sold for the special order without reducing Rutkey's profits?

c. If Rutkey Collectibles company was operating at capacity, what would happen to operating profit if the special order was accepted?

Answer 1

ANSWER a

	17900 units		17900 units + 800units
sales	59070[17900*3.30]		60910 [17900*3.30+800*2.30]
material	12530 [17900*0.7]		13090[18700*0.7]
labor	14320 [17900*0.8]		14960[18700*0.8]
variable	5370 [17900*0.3]		5610[18700*0.3]
contribution margin	26850[59070-12530-14320-5370]		27250[60910-13090-14960-5610]
fixed cost	17900		17900
operating income	8950		9350

rutkey's profit increased from 8950$ to 9350$ as fixed costs remains the same.

answer b.

variable cost to produce a unit of car is minimum price = 1.8$

check

17900*3.3 + 800*x = 1.8$ variable cost * 18700units + 17900fixed cost +8950profit

59070+800x = 33660+17900+8950

800x= 1440

x= 1.8$ i.e the variable cost to produce additional units.

answer c

rutkey have to reduce its current units from 17900 to 17100[17900-800] as it does not have additional capacity for special order.

sales	58270	[17100*3.3+800*2.3]
variable cost	32220	[17900*1.8]
margin	26050	[58270-32220]
fixed cost	17900
net operating income	8150
profit reduced by	800$	[8950-8150]

that is difference of selling price between existing units and special order. [3.3-2.3] 1 * 800units =800$