Question

The Phone Company has the following costs of producing and selling a cell phone when it produces and sells 100,000 cell phones per month: Per unit manufacturing cost Direct materials $60.00 Direct labor 10.00 Variable manufacturing overhead cost 35.00 Fixed manufacturing overhead cost 20.00 Per unit selling cost Variable 25.00 Fixed 10.00 Note that ‘100,000’ is the denominator used to calculate fixed costs per unit. Total fixed costs do not change regardless of production/sales level. The selling price of a cell phone is $250, unless otherwise stated in the questions below. Each situation below is independent of the other situations. That is, when you answer one question, assume that the situations described in other questions have not occurred. When you are considering opportunities for increased sales, assume that Phone Company has enough manufacturing capacity to make these sales without incurring additional fixed costs (i.e., it has excess capacity). S

The Phone Company has received an offer by a contract supplier to make and ship the Phone Company’s cell phone (100,000 units) directly to the Phone Company’s customers. The Phone Company will continue to do some product design and marketing but will no longer manufacture the phones itself. If the Phone Company accepts this offer, its variable manufacturing costs would be $0 and its fixed manufacturing cost would be reduced by 75% of its current level. In addition, its variable selling cost would decrease by one-third and its fixed selling cost would not change. How much per cell phone could the Phone Company pay the contract supplier if it wants to maintain its present level of operating income?

Answer 1

Net operating income (Before)

sales (100000*250)	25000000
less:variable cost (60+10+35+25)*100000	(13000000)
Contribution margin	12000000
less:fixed manufacturing cost (20*100000)	2000000
Fixed selling cost (10*100000)	1000000
Total fixed cost	(3000000)
Net operating income	9000000

**if variable cost decrease by 1/3 then revised cost : 1-1/3 = 2/3

sales revenue	25000000
less:cost and profit desired (other than amount paid to contract supplier)
Fixed manufacturing cost (2000000*(1-.75)]	500000
Variable selling cost (100000*25*2/3]	1666666.67
fixed selling cost	1000000
Desired net operating income	9000000
Total cost	(12166666.67)
Net cost paid to contract supplier	12,833,333.33
Number of cell phones	100000
cost per cell phone paid to contract supplier	$ 128.33

the Phone Company pay the contract supplier if it wants to maintain its present level of operating income = $ 128.33 per cellphone