Question

Rosey Industries manufacturing two smart educational toys: puzzleball and dreambox. The company has a long term contract to rent manufacturing equipment and necessary space for $900,000 per year and makes each product at a variable cost of $250 per unit. Currently, it makes 1,000 units of each product per year and sells puzzleballs for $800 and dreamboxes for $1,000 per unit. Last year's income statement using the contribution approach is shown below: Revenue $1,800,000 (puzzleballs: 1,000 units @ $800; dreamboxes: 1,000 units @ $1,000) Less: Variable Cost (2,000 units @ $250) (500,000) Contribution Margin 1,300,000 Less: Fixed Manufacturing Costs (900,000) Less: Selling, General and Admin Expenses (200,000) Operating Income $200,000 The president of the company is pondering how he should respond to a request for a bid brought in by the sales manager- requested by an overseas company. The request is from outside Rosey's usual and planned market areas, and is for a one time shipping of 500 units of dreamboxes. The overseas company would pay all the shipping costs and this would be a one time deal. Rosey believes this company only operates overseas, so accepting its order will have no effect on the company's normal sales. The president believes that the company currently has sufficient capacity to handle the additional 500 units of output without needing additional equipment or space. The deal will not affect Selling, General and Admin Expenses. In considering what price to bid, Rosey wants to first determine the minimum price that she can accept on the order without lowering the company's operating income. The sales manager has suggested a figure of $700 based on the following calculations: Variable manufacturing cost per unit $250 Fixed manufacturing cost per unit $450 Full manufacturing cost per unit $700 TO DO Based on the information provided, what is your advice to Rosey Industries? Compute unit costs for puzzleball and dreambox to support your response. Feel free to include any other information relevant to the decision making process.

Answer 1