Question

Mazeppa Corporation sells relays at a selling price of $28 per unit. The company's cost per unit, based on full capacity of 160,000 units, is as follows:

Direct materials	$	6
Direct labor		4
Overhead (2/3 of which is variable)		9

Mazeppa has been approached by a distributor in Montana offering to buy a special order consisting of 30,000 relays. Mazeppa has the capacity to fill the order. However, it will incur an additional shipping cost of $2 for each relay it sells to the distributor.

a-1. Assume that Mazeppa is currently operating at a level of 100,000 units. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $4 per unit?

a-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the increase in selling price?

b-1. Assume that Mazeppa is currently operating at full capacity. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $60,000 more than it would be without accepting the special order?

b-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the unit price charged to the distributor?

Answer 1

a-1

Assume that Mazeppa is currently operating at a level of 100,000 units. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $4 per unit?

Variable overhead (2/3*9)

6

Selling price

22

Less : Direct Materials

6

Direct Labor

4

Variable Overhead

6

Additional Shipping Costs

2

Contribution Margin per unit

4

a-2

At current operating level of 100000 units, the company need not turn away any of its regular customers so that this order can be fulfilled

If the company wish to increase the operating income by $ 4 than it has to generate a cotribution margin of $ 4 per unit which would make the selling price of the product as $ 22 per unit

b-1

Selling Price

32

Less : Direct Materials

6

Direct Labor

4

Variable Overhead

6

Additional Shipping Costs

2

Contribution Margin per unit

14

b-2

In order for the company to increase the operating income by $ 60000, the contribution margin per unit should include the special order shipping costs which is $ 2 per unit more (2*30000) = $ 60000 than the normal contribution margin

Normal Contribution Margin is 28 - (6+4+6)

12

The selling price of the special order must cover the additional shipping costs which would result in contribution margin of $ 14 ($12+$2).

Therefore, the required selling price would be $ 32 per unit