Question

Q3 (20%) Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers:

                                        Variable costs:

                                    Direct materials                    $140

                                    Direct labor                             100

                                    Manufacturing support          105

                                   

                              Fixed costs:

                                    Manufacturing support          175

                                    Marketing costs                        65

                              Total costs                                     585

                              Markup (50%)                             292.5

                              Targeted selling price               $877.5

Required:

a. What is the contribution margin per unit?

b. Crandle Manufacturers Inc. , what is the minimum acceptable price of this one-time-only special order?

c.       Other than price, what other items should Crandle Manufacturers Inc. consider before accepting this one-time-only special order?

d.      How would the analysis differ if there was limited capacity?

Answer 1

SOLUTION:

a. Contribution Margin Per Unit:

Variable Cost per unit = Direct Materials + Direct Labour + Mfg Support

= 140+100+105

= 345

Selling Price per unit = 877.5

Contribution Margin per unit = Selling price per unit - Variable cost per unit

= 877.5 - 345

= 532.5

Hence Contribution Margin per unit is $ 532.5

b. the minimum acceptable price

It is a one time only special order. Further, the order is from overseas customer. Hence, selling price quoted to overseas customer will not have an impact on domestic sales.

In domestic market, the selling price includes apportionment of fixed cost. Fixed cost will anyways be recovered in domestic market itself. As such, for the one time special overseas order, only incremental costs are relevant for pricing and decision making. Hence, only total variable cost per unit is considered (i.e, direct materials, direct labor, manufacturing support costs) amounting to $345/-

Total Variable cost = 345

Mark up = 50%

Minimum Acceptable Price = Total Variable Cost + Mark up

= 345 + (345*50%)

= 345 + 172.5

= 517.5