Question

Marquette Manufacturing produces “invisible” electric dog fences, sold through retail locations nationwide. The selling price of the fence is $150 per unit. The cost to manufacture and market the fences is shown below. These figures represent the cost at the company’s normal volume of 3,000 units per month.

Unit Manufacturing Costs
	Variable materials	$   15.00
	Variable labor	$   17.50
	Variable overhead	$   12.50
	Fixed overhead	$   16.00
Total unit manufacturing costs			$   61.00
Unit Marketing Costs
	Variable	$     12.00
	Fixed overhead	$     17.00
Total unit marketing costs			$     29.00
	Total unit costs		$ 90.00

(NOTE: Unless otherwise stated, assume that no connection exists between the situation described in each question; each is independent. Also, ignore taxes or other costs not specifically mentioned in the questions.)

1. The company’s marketing team estimates that sales volume could be increased to 5,000 units per month if the sales price was lowered from $150 to $125 per unit. The production manager has confirmed that they have the capacity to increase production to this level. Assume that the cost pattern will not vary at the increased level of production. If management decreases the price, what would the impact on monthly sales, income and costs be? For each figure, indicate whether the change will result in an increase, decrease or no change in the sales, income and cost. Would you recommend the reduction in sales price? Why or Why not? (Show all supporting calculations).

2. At the end of the year the production manager is taking inventory and finds 600 units of an older model of invisible fencing that the company no longer manufactures. These obsolete units can be disposed of through their regular channels, thereby incurring variable marketing expenses. What is the lowest price that they should accept for these obsolete units, realizing that if they do not sell them these units will have to be thrown away. (Show all supporting calculations).

3. Marquette receives a proposal from an outside contractor who offers to make and ship 1,500 fences directly to Marquette’s customers as orders arrive from Marquette’s sales force. When managers meet to discuss this proposal, Product Manager Will Hansen brings up the fact that they have the design for an electric fence that can be used for large animals that has never been produced. Will suggests that this may be the perfect time to launch this new product and at a selling price of $225 per unit it is sure to increase sales revenue. The production manager calculates that the idle time created by accepting the contractors offer would allow them to produce 1,000 of the new fence. The cost to produce the new fence would be $175 in variable manufacturing expense but fixed manufacturing and marketing costs would remain unchanged. The product mix would now be 1,000 of the new fence and 1,500 of the old fence. If Marquette wants to seriously consider taking the contractors offer, what in-house cost should be used to evaluate the outside contractor’s bid. If the payment to the outside contractor is $90 per unit, should they accept the offer? Why or why not? (Show all supporting calculations).

4. On March 1, Marquette is approached by the developer of a large subdivision who wants to install an invisible fence in the yard of 1,200 homes he is constructing. The developer will contract with Marquette for the 1,200 fences on the condition that they are delivered within 30 days (March 31). This is not good timing for Marquette since they have recently signed a contract with Home Warehouse, a national home improvement chain and have been working at 100% capacity for several months. If Marquette accepts the builder’s order, it will lose 1,200 units that would normally be sold to one of its existing customers. When they tell the developer that they do not believe they can fill his order, he offers to reimburse the company for his “share” of the fixed manufacturing costs and will pay a $5,000 “bonus” on delivery. Since the sale to the developer will not incur any variable marketing costs, Marquette reconsiders accepting the developer’s order. What impact will accepting this order have on Marquette’s income in March? Should Marquette accept the order from the developer? Why or Why not? (Show all supporting calculations).

5. Marquette has an opportunity to sell its product through an online retailer. To begin selling through this online platform, they are required to ship 2,000 units to the retailers’ order fulfillment warehouse. The other condition of this offer is that they pay a one-time vendor marketing fee of $5,000. To get the units to the fulfillment warehouse by the deadline Marquette will need to pay for expedited shipping at a cost of $10 per unit. What is the minimum price Marquette should charge the retailer for this initial order of 2,000 units? (Show all supporting calculations).

Answer 1

Condition 1 :- Reducing sale price

Total variables cost of manufacturing 3000 units = ( 45*3000)=135000

Total fixed production cost = 16*3000=48000

Fixed marketing cost = 17*3000=51000

Profit on sales of 3000 units =(150*3000)-(171000-48000+51000-(12*3000))=180000 or 60/unit

If the company increase the production and reduces the prices then

Profit will be

(125*5000)-(57*5000)-(99000(fixed cost )=625000-384000 =241000 or 48.2/unit

Thus :-

1) Profit per unit decrease

2) Fixed manufacturing expenses reduce (48000/5000)=9.6/unit

3) Fixed marketing expenses reduce =(51000/5000)=10.2/unit

Condition 2 - Selling obsolete units :-

Price of the unit must be kept such that it covers it's marketing expenses and variables cost of marketing =54/unit

Condition 3 - Outsourcing the contract :-

Cost of contract = 90*1500=135000

The in-house cost should include all variable expenses and proportionate fixed expenses

When total production is 1000+1500 the per unit fixed expenses are 99000/2500=39.6

In house cost =45+39.6=84.6/unit

To sell the products directly to customers , it is assumed that variable marketing cost is nil .

Total revenue = (1500*150)+(1000*225)=450000

Total cost incurred =(175*1000)+99000(Fixed )+(17*1000)+135000=426000

Total profit =450000-426000=24000 or 9.6/unit

Condition 4 - Contract for house fences :-

If the contract of 1200 was fulfilled the profit earned would have been

(150*1200)-((54*1200+(99000/1200)=180000-163800=16200

New revenue earned will be (150*1200)+5000-(45*1200)-(99000/1200)=185000-153000=32000

Yes the profit will increase if the company chooses this option

Condition 5 - Online selling :-

Cost of selling =

Variable (2000*45)+(48000)fixed +5000+(10*2000)shipping =163000

Per unit cost =163000/2000=81.5/unit

The minimum price to cover all cost =81.5

However if the company wants to earn profits also then

An initial profit of 60/ unit will make the price (81.5+60)=141.5/unit