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 $40 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 6.40 Direct labor 14.00 Variable manufacturing overhead 2.00 Fixed manufacturing overhead 5.00 Variable selling expenses 5.80 Fixed selling expenses 5.40 Total cost per unit $ 38.60 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 $150,000. 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 $4,620. The only selling costs that would be associated with the order would be $4.40 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 20% 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 400 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 20%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be reduced by 60%. 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

1.a. Incremental net operating Income = - $ 72,120.

Contribution margin per unit = Selling Price per Unit - Variable Costs per Unit = $ 40 - $ ( 6.40 + 14.00 + 2.00 + 5.80) = $ 11.80

Incremental net operating income = Incremental contribution margin - Incremental fixed selling expenses = 6,600 x $ 11.80 - $ 150,000 = - $ 72,120.

b. No, the increased fixed selling expenses would not be justified.

2. Break-even price of the special order: $ 27.50

Direct Materials ( 6,600 x $ 6.40)	$ 42,240
Direct Labor ( 6,600 x $ 14.00)	92,400
Variable Manufacturing Overhead ( 6,600 x $ 2.00)	13,200
Cost of licences permits etc.	4,620
Shipping Cost ( 6,600 x $ 4.40)	29,040
Total Cost	$ 181,500
Sales Units	6,600
Break-even Price	$ 27.50

4. The unit cost figure relevant for setting a minimum selling price : $ 5.80 per unit.

The cost incurred on the 400 units of Wims is a sunk cost. Therefore, it is not relevant for the purpose. The only relevant cost for setting a minimum selling price is the unit variable selling expenses of $ 5.80 per unit.

5. Unit cost that is relevant for comparison to the price quoted by the outside manufacturer: $ 29.88

The relevant costs are those that can be avoided by outsourcing.

Direct Materials	$ 6.40
Direct Labor	14.00
Variable Manufacturing Overhead	2.00
Fixed Manufacturing Overhead ( $ 5.00 x 80%)	4.00
Variable Selling Expenses ( $ 5.80 x 60%)	3.48
Total Relevant Cost	$ 29.88