Question

Short term Decisions with Relevant Information

Becker Company produces and sells pens and markers. The following are the Becker Company’s unit costs of manufacturing and marketing one of its pens, a high-style model, at an output level of 20,000 per month. The selling price of the pen is $6.

Manufacturing Cost
Direct Materials	$1.00
Direct manufacturing labor	$1.20
VOH cost	$0.80
FOH cost	$0.50
Marketing Costs
Variable	$1.50
Fixed	$0.90

The following independent situations and opportunities have arisen during the month. You have been asked to evaluate each. Make a recommendation regarding each opportunity. Write your recommendation to your supervisor, providing supporting calculations along with appropriate written short answer or executive memo, as appropriate.

1. The pen is usually produced and sold at the rate of 240,000 units per year (an average of 20,000 per month). The selling price is $6 per unit, which yields total annual revenues of $1,440,000. Total costs are $1,416,000 and operating income is $24,000, or $0.10 per unit. Market research estimates that unit sales could be increased by 10% if prices were cut to $5.80. What effect will these changes have on operating income? If price is reduced to $5.80, what level of sales are required to maintain the current operating income of $24,000?

2. Becker Company currently sells 20,000 pens per month. The Company receives a request to sell a special order of pens. The state government contracts for 5,000 pens. The government will reimburse ALL manufacturing costs plus a fixed fee of $1,000. No variable marketing costs are incurred on the government contract. If Becker has excess capacity for the special order, should they accept? What will be the effect of acceptance on Operating Income? How would your analysis change if Becker does NOT have excess capacity?

3. The company wants to enter a foreign market in which price competition is keen. Becker want to fulfill a one time special order request for 10,000 pens. The shipping costs for the order will amount to $0.75 per unit, and the fixed costs of obtaining the contract will be $4,000. The company incurs no variable marketing costs other than shipping costs. Domestic business will be unaffected. What is the minimum selling price for this special order?

4. A proposal is received from an outside supplier who offers to make and ship the high-style pens directly to Becker’s customers – as sales orders are forwarded from Becker’s sales staff. Becker’s fixed marketing costs will be unaffected, but its variable marketing costs will be slashed by 20%. A portion of Becker’s plant will be idle, but its fixed manufacturing overhead will continue at 50% of present levels. What is the minimum price Becker would be willing to pay the supplier, without changing current operating income.

Answer 1

Ans. 1   Calculation of variable cost per unit

Direct material                       =     1

Direct labour                          =     1.2

VOH                                         =      .80

Variable marketing cost       =     1.50

Total VC per unit                    =     4.50

Total cost including fixed cost per unit (4.5+.50+.90)= 5.90 per unit

Current sales volume = 240000

Sales unit to be increase by 10% no of unit increase by =24000 units

Revised sale unit = 264000

Revised Sale price = 5.80

Revised sale value (264000X5.8) = 1531200

Fixed cost (1.4X240000) = 336000

Fixed cost will be same both the situation

                                              Evaulation of effect of operating income

                                                   Existing unit (@6)               Revised Unit (@5.80)

No of unit sale                             240000 264000

Sales                                            1440000                                       1531200

VC (@4.5 each per unit)            1080000                                       1188000

Fixed cost          336000                                         336000

Operating profit                             24000                                           7200

if sales price is decrease to $5.80, the operating profit will be decrease by (24000-7200) 16800 to 7200.

Sale required for maintaining same operating profit amount = 24000

Contribution per unit (5.8-4.5) =$1.30 per unit

Fixed cost = 336000

Required sale = (336000+24000) /1.30= 276924 units

Required sale units to maintain same operating profit is = 276924 units

Ans 2.   Evaulation of Government order of 5000 units of pen

Total manufacturing cost that Government will reimburse (1+1.2+.80+.50) = $3.5 per unit

Total Revenue received from Government for 5000 units (3.5X5000)+1000 = $18500

Total variable cost for manufacturing 5000 units @3each = 15000

Net operating profit of 5000 units sale to government (18500-3000) = 3500

If company having Spare capacity and government order is accepted than company operating profit will increase by 3500. so company total operating profit will be (24000+3500) = 27500

and if company not having spare capacity company operating will be same $24000

Ans 3.    Evalulation of Foreign market proposal of 10000 pens

Step 1: Calculation of minimum order price

Direct material                                                       =    $1

Direct labour                                                          =     $1.2

Variable manufacturing cost (                             =    $.80

Shipping cost per unit                                          =    $.75

Fixed cost for obtaining order (4000/10000)    =   $.40

Minimum selling price for this special order    =   $4.15

Ans 4.                   Evaluation of Outside supplier proposal

Step 1: calculation minimum price becker would be willing to pay the supplier

Direct material                     =    1

Direct labour                            =   1.20

V/OH                                          =   0.80

FO/H (.50X.50)                      =   0.25

Variable marketing(1.50X.80 = 1.20

Minimum price                          = $4.45

Minimum price becker would be willing to pay the supplier is $4.45