Question

Richter Company has a single product called a Wim. The company normally produces and sells 66,000 Wims each year at a selling price of $38 per unit. The company’s unit costs at this level of activity are given below:

Direct materials	$	8.40
Direct labor		11.00
Variable manufacturing overhead		3.00
Fixed manufacturing overhead		6.00
Variable selling expenses		3.90
Fixed selling expenses		5.00
Total cost per unit	$	37.30

A number of questions relating to the production and sale of Wims are given below. Each question is independent.

Required:
1.	Assume that Richter Company has sufficient capacity to produce 72,600 Wims each year without any increase in fixed manufacturing overhead costs. The company could increase sales by 10% above the present 66,000 units each year if it were willing to increase the fixed selling expenses by $140,000.

a.	Calculate the incremental net operating income. (Negative amount should be indicated by a minus sign.)

        

b.	Would the increased fixed selling expenses be justified?
	No Yes

2.

Assume again that Richter Company has sufficient capacity to produce 72,600 Wims each year. The company has an opportunity to sell 6,600 units in an overseas market. Import duties, foreign permits, and other special costs associated with the order would total $2,640. The only selling costs that would be associated with the order would be $3.30 per unit shipping cost. Compute the per unit break-even price on this order. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

        

3.

One of the materials used in the production of Wims is obtained from a foreign supplier. Civil unrest in the supplier’s country has caused a cutoff in material shipments that is expected to last for three months. Richter Company has enough material on hand to operate at 20% of normal levels for the three-month period. As an alternative, the company could close the plant down entirely for the three months. Closing the plant would reduce fixed manufacturing overhead costs by 25% during the three-month period and the fixed selling expenses would continue at two-thirds of their normal level. What would be the impact on profits of closing the plant for the three-month period? (Round your intermediate calculations of units produced and sold to the nearest whole number. Do not round your other intermediate calculations. Round your final answer to nearest whole number.)

         

4.

The company has 600 Wims on hand that were produced last month and have small blemishes. Due to the blemishes, it will be impossible to sell these units at the normal price. If the company wishes to sell them through regular distribution channels, what unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.)

        

5.

An outside manufacturer has offered to produce Wims and ship them directly to Richter’s customers. If Richter Company accepts this offer, the facilities that it uses to produce Wims would be idle; however, fixed manufacturing overhead costs would continue at 25%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be reduced by 50%. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

        

Answer 1

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1a.
	Sellin Price		38
	Variable Cost:
	Direct Material		8.4
	Direct Labor		11
	Variable Manufacturing Ovh		3
	Variable Selling Expense		3.9
	Total Variable Cost per unit		26.3
	Contribution Margin per unit		11.7
	Incremental Units	72600-66000	6600
	Incremental Contribution Income	6600*11.7	77220
	Less: Incremental Sellling Fixed Exp		140000
	Incremental Operating Income/(Loss)	77220-140000	-62780
1b.	NO as incremental contribution not enough to take care of incremental Selling exp
2.
	Direct Material		8.4
	Direct Labor		11
	Variable Manufacturing Ovh		3
	Shipping Cost		3.3
	Permit etc	2640/6600	0.4
	Variable Cost per unit		26.1
	Break even point (Fixed Cost/Cont per unit)		26.10
3.
	Unit Sold (66000*3/12*20%)	3300
	Contribution per unit (From 1a)	11.7
	Contribution Margin lost if plant closed	38610
	Fixed Cost avoided if plant closed:
	Fixed Manufacturing Cost (6*66000)*3/12*25%	24750
	Fixed Selling expense (5*66000)*3/12*1/3	27500
	Advantage of closing plant	13640
4.	Relevant cost is: 3.90. Since irregular units have already been produced, all production cost are Sunk.
	Fixed Selling cost not relevant as they will be incurred even if irreuglar product not sold
5.
	Variable Manufacturing Cost		22.4
	Fixed Manufacturing Overhead	(6*66000)*75%=297000/66000	4.5
	Variable Selling Expense	3.9*50%	1.95
	Total Cost avoided		28.85
	To be acceptable, outsider quote should be less thatn 28.85