Question

Corp. manufactures and sells a number of products, including Product G 10,000 units were sold last year. Results for last year for the manufacture and sale of Product G are a follows:

Sales $750,000 Less expenses: Variable production cost $450,000 Sales commissions 110,000 Salary of product manager 95,000 Fixed product advertising 80,000 Fixed manufacturing overhead 70,000 Net Operating loss 805,000 ($55,000)

A) Beta is trying to decide whether to discontinue the manufacture and sale of Product G. All expenses other than the fixed manufacturing overhead are avoidable is the product is dropped. Half of the fixed manufacturing overhead is avoidable. Using the above information and assuming that dropping product G will have no effect on another product line. If BETA drops Product G, compute the change in annual net operating income

B) Beta receives a special order for 100 units of Product G from ALPHA Corp. The special order would not involve any selling costs, but BETA would have to purchase an imprinting machine for $1,000 to add the logo of ALPHA Corp to the product What is the minimum price per unit which BETA could accept for this special order? There is ample idle capacity to fulfill the order

Answer 1

A) Change in annual net operating income: Increase by $20000

	Continue Product G	Discontinue Product G	Increase (Decrease) in Net operating income
Sales	750000	0	-750000
Variable production cost	450000	0	450000
Sales commissions	110000	0	110000
Salary of product manager	95000	0	95000
Fixed product advertising	80000	0	80000
Fixed manufacturing overhead	70000	35000	35000
Net operating income (loss) $	-55000	-35000	20000

B) Minimum price per unit for special order: $55

Variable production cost	4500
Cost of imprinting machine	1000
Total cost of special order $	5500
Number of units	100
Price per unit $	55

Note: There would be no sales commissions and fixed product advertising on the special order, the same being selling costs. The salary of product manager and fixed manufacturing overhead would remain the same since Beta has idle capacity and hence are not considered. Thus, the only costs to consider for the special order pricing would be the variable production cost and the cost of the imprinting machine required to be purchased.