Question

Alton Inc. is working at full production capacity producing 31,000 units of a unique product. Manufacturing costs per unit for the product are as follows:

Direct materials	$	7
Direct labor		6
Manufacturing overhead		8
Total manufacturing cost per unit	$	21

The per-unit manufacturing overhead cost is based on a $3 variable cost per unit and $155,000 fixed costs. The nonmanufacturing costs, all variable, are $10 per unit, and the sales price is $38 per unit.

Sports Headquarters Company (SHC) has asked Alton to produce 7,200 units of a modification of the new product. This modification would require the same manufacturing processes. However, because of the nature of the proposed sale, the estimated nonmanufacturing costs per unit are only $5 (not $10). Alton would sell the modified product to SHC for $28 per unit.

Required

1-a. Calculate the contribution margin for 7,200 units for both the current and special order.

1-b. Should Alton produce the special order for SHC?

2. Suppose that Alton Inc. had been working at less than full capacity to produce 25,900 units of the product when SHC made the offer. What is the minimum price per unit that Alton should accept for the modified product under these conditions?

Answer 1

1-a)

	Contribution margin
Current	$86,400
Special order	$50,400

Explanation:-

	Current	Special Order
Selling Price	$38	$28
Variable Costs:
Direct Material	$7	$7
Direct Labor	$6	$6
Variable Manufacturing overhead	$3	$3
Variable non manufacturing overhead	$10	$5
Total Variable costs	$26	$21
Contribution margin per unit	$12	$7
Contribution margin for 7,200 units	$86,400 (7,200 ×$12)	$50,400 (7,200 × $7)

1-b

No, Alton should not produce the special order for SHC.

2.

Minimum Price

$24.5 per unit

Explanation:-

Idle Capacity = Full Production Capacity - Working at Capacity

Idle Capacity = 31,000 Units - 25,900 units

Idle Capacity = 5,100 Units

If Alton accept the SHC order, it will lose existing sale of = 7,200 units - 5,100 units = 2,100 units

Contribution lost due to loss of existing sales = 2,100 units × $12

Contribution lost due to loss of existing sales = $25,200

Additional Contribution required from SHC = $25,200/7,200

Additional Contribution required from SHC = $3.5 per unit

Minimum price per unit that Alton should accept for modified products = Variable cost per unit of SHC order + Additional Contribution required

Minimum price per unit = $21 + $3.5

Minimum price per unit = $24.5 per unit