Question

Harcourt Manufacturing (HM) has the capacity to produce 10,200 fax machines per year. HM currently produces and sells 7,200 units per year. HM currently leases its excess capacity for a rental fee of $16,000. The fax machines normally sell for $120 each. Modem Products has offered to buy 2,200 fax machines from HM for $70 each. Unit-level costs associated with manufacturing the fax machines are $19 each for direct labor and $44 each for direct materials. Product-level and facility-level costs are $52,000 and $67,000, respectively. Based on this information (ignore qualitative characteristics)

Answer 1

Calculating current profit

Sales = 7,200 units X $120 = $,864,000

Less: Variable Cost, Direct labor $19 + Direct material $44 = $63 each unit

= $7200 X $63 = $453,600

Less: Fixed Cost = Product level $52,000 + Facility Level $67,000 = $119,000

Total profit = $864,000 - $453,600 - $119,000 = $291,400

Since the entire production capacity is for 10,200 units and 7,200 units are produced and sold the remaining capacity of production is 3,000 units, but Modem Products is ordered for 3,200 units which is beyond the capacity and will require additional fixed cost.

Thus profit on sale of these 2,200 units

Sales value = 2,200 X $120 = $264,000

Less: Variable cost per unit of $103 = 2,200 X $63 = $138,600

Contribution on these 2,200 units = $264,000 - $138,600 = $125,400

Additional fixed cost on which HM currently leases its excess capacity for a rental fee = $16,000

This concludes that profit will decrease by $109,400($125,400-$16,000) with this order of 2,200

Break even point for this order is 2286 Units (16000/(70-63)) i.e., any order beyond this point of units would increase the current profit and any order below 3000 units would add an additional profit of $7 per additional unit sold, if sold at $70 per unit under given circumstances.

Thank you.