Question

Mazeppa Corporation sells relays at a selling price of $28 per unit. The company's cost per unit, based on full capacity of 160,000 units, is as follows: Direct materials $ 8 Direct labor 6 Overhead (2/3 of which is variable) 9 Mazeppa has been approached by a distributor in Montana offering to buy a special order consisting of 30,000 relays. Mazeppa has the capacity to fill the order. However, it will incur an additional shipping cost of $2 for each relay it sells to the distributor. a-1. Assume that Mazeppa is currently operating at a level of 100,000 units. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $5 per unit? a-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the increase in selling price? b-1. Assume that Mazeppa is currently operating at full capacity. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $60,000 more than it would be without accepting the special order? b-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the unit price charged to the distributor?

Answer 1

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Mazeppa Corporation
Variable and fixed costs
Manufacturing costs are classified as variable and fixed. Variable costs are expenses that are directly related to the number of units produced while fixed costs are expenses that are not dependent on the units of production.
a-1. Assume that Mazeppa is currently operating at a level of 100,000 units. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $5 per unit?
Particulars	Per unit
Direct materials	8.00
Direct Labor	6.00
Variable Overhead (9 * 2/3)	6.00
Shipping cost	2.00
Total variable cost	22.00
Desired operating income	5.00
Unit Price	27.00
a-2. Interpretation of Contribution margin per unit
	Current	New Order
Unit Price	28.00	27.00
Direct materials	8.00	8.00
Direct Labor	6.00	6.00
Variable Overhead (9 * 2/3)	6.00	6.00
Shipping cost		2.00
Total Variable cost	20.00	22.00
Contribution margin per unit	8.00	5.00
Decreased by		3.00
Contribution margin per unit is decreased by $ 3 per unit.
a-2. Interpretation of operating income
Contribution margin per unit from special order	5.00
Level of units	30,000.00
Increase in Operating income by	150,000.00
b-1. Assume that Mazeppa is currently operating at full capacity. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $60,000 more than it would be without accepting the special order?
Original data for operating income
Unit Price	28.00
Direct materials	8.00
Direct Labor	6.00
Variable Overhead (9 * 2/3)	9.00
Total cost per unit	23.00
Operating Income per unit	5.00
No. of Units	160,000.00
Total Operating Income	800,000.00
Desired increase	60,000.00
Desired operating income	860,000.00
Computation of the required unit price
Selling price	28.00
Direct materials	8.00
Direct Labor	6.00
Variable Overhead (9 * 2/3)	9.00
Total cost per unit	23.00
Operating Income per unit	5.00
No. of Units (160,000-30,000)	130,000.00
Total Operating Income	650,000.00
Desired operating income	860,000.00
Required increase in operating income for the 30,000 units	210,000.00
No. of Units	30,000.00
Per unit	7.00
Total variable cost	22.00
Required unit price for the 30,000 units	29.00
b-2. Interpretation of Contribution margin per unit
	Current	New Order
Unit Price	28.00	29.00
Direct materials	8.00	8.00
Direct Labor	6.00	6.00
Variable Overhead (9 * 2/3)	6.00	6.00
Shipping cost		2.00
Total Variable cost	20.00	22.00
Contribution margin per unit	8.00	7.00
Decreased by		1.00
Contribution margin per unit is decreased by $ 1 per unit.
b-2. Interpretation of operating income
Contribution margin per unit from special order	7.00
Level of units	30,000.00
Increase in Operating income by	210,000.00