Question

FIllmore Steel Company of Texas manufacturers Part 748 (a component used in the developing of skyscraping buildings). The company has a capacity to produce 150,000 units per month and is currently operating at 75 percent of the capacity. The cost structure is as follows:

Per unit cost

Direct Materials $8.00

Direct Labor $6.00

Manufacturing overhead $12.00 _______

Manufacturing cost $26.00

In addition, the company incures $1.00 per unit on Freight and also pays 5% (on selling price) as sales commission. The regular selling price of Part 748 is $34.00 per unit. The manufacturing overhead rate is $24.00 per hour which 1/3 is varialbe and 2/3 is FIXED. It requires 1/2 hour to manufacture one unit. The direct materials and direct labor are considered as variable costs.

Hunai Manufacturing Company of Tokyo, Japan has approached the Fillmore Steel Company for the purchase of 30,000 units of Part 748 next month at $20.00 per unit, FOB shipping point. Fillmore Steel Company will NOT pay any sales commission on this special order. However, an additional FIXED cost of $13,000 for the month will have to be incurred for additional administrative and clerical work. This cost is exclusively related to the special order.

The management of Fillmore Steel Company has approaced you to solve this problem.

Required:

1. Prepare an income statement to analyze accept/reject alternative.

2. What is the minimum price at which Part 748 can be sold to Belfast Company by maintaing the current level of net income?

3. Calculate the contribution margin per unit and the break-even level (in units) disregarding the purchase offer from Hunai Manufacturing Company.

4. In case, if this special order is to be accepted, how best you can convince the regular customers, who are paying $34.00 for Part 748.

PLEASE show all calculations as this is a case project for an oral presentation. Thanks.

Answer 1

1. Capacity of company to produce part 748 = 150,000 units

Total Number of part 748 units produced by Fillmore Steel Company of Texas manufacturers: 150,000 * 75% = 112,500

Number of Hours required for manufacturing one unit: 1/2

Manufacturing overhead rate per hour = $24

Manufacturing overhead for one unit = 24*1/2 = $12

Fixed manufacturing overhead $12*2/3= $8

Variable manufacturing overhead $12*1/3= $4

Income Statement of Fillmore Steel Company (Amount in $)                                                      

Particulars	Amount per unit	Amount per unit	Amount for 112,500 units
Sales Revenue		34.00	3,825,000
Less: Variable Costs
Direct Materials	8
Direct Labour	6
Variable Manufacturing Overhead	4
Freight	1
Sales Commission 34*5%	1.70
		(20.70)	(2,328,750)
Contribution margin per unit		13.30	1,496,250
Less: Fixed Manufacturing Overhead		(8.00)	(900,000)
Net Income Per unit		5.30	596,250

Hunai Manufacturing Company of Tokyo purchased 30,000 units at $20/unit at FOB

Remaining Units to be sold = 112,500-30,000

                                                      = 82,500                        

Particulars		Amount for 82,500 units		Amount for 30,000 units
Sales	34	2,805,000	20	600,000
Less: Variable Costs
Direct Materials	8		8
Direct Labour	6		6
Variable Manufacturing Overhead	4		4
Freight	1
Sales Commission 34*5%	1.70
	(20.70)	(1,707,750)	(18)	(540,000)
Contribution margin per unit	13.30	1,097,250	2.00	60,000
Less: Fixed Manufacturing Overhead	(8.00)	(660,000)	(8.00)	(240,000)
Less: Additional Fixed Cost				13,000
Net Income Per unit	5.30	437,250		(1,93,000)

Total Income if company opts for Hunai Manufacturing Company of Tokyo is $244,250

Answer: Company should reject the Hunai Manufacturing Company of Tokyo offer because it reduce the company’s net income from $596,250 to $244,250

2. Minimum Selling Price in case of goods sold to Hunai manufacturing company

Variable Cost incurred: $18/unit

Additional Fixed Cost: 13,000 for 30,000 units

Total cost = 18*30000+13,000 = 553,000

Cost per unit = 253,000/30,000 = 18.43

Current Profit on cost = Income per unit/ total cost

                                            = 5.30/28.70*100

                                            = 18.47%

Minimum Selling Price = Cost * (1+Profit Margin)

                                           = 18.43*(1+18.47/100)

                                            = $21.83

3. Contribution margin per unit = Sales/unit – Variable Cost/unit

                                                                = 34.00 – 20.70

                                                                = $13.30

Break-even level (in units) = Total Fixed Expenses/Contribution per unit

                                                     = 900,000/13.30

                                                =67669.17 units