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 $3 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?

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 $3 per unit?

	Special Sale Selling price Less: Direct materials Direct labor Variable overhead Additional shipping costs 0 Contribution margin per unit $0

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?

	At a current operating level of 100,000 units, the company will not have to turn away any of its regular customers in order to fill the special order. If it wishes to increase operating income by per unit included in the special order, it only needs to generate a contribution margin per unit of Thus, the selling price per unit included in the special order is

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?

	Special Sale Selling price Less: Direct materials Direct labor Variable overhead Additional shipping costs 0 Contribution margin per unit $0

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?

In order for the company to increase its operating income $60,000 above what it would be without the order, the contribution margin per unit included with the special order must be $2 per unit more ($2 × 30,000 units = $60,000) than the normal contribution margin. The normal contribution margin is the sales price, $28, less all variable costs [ + + (2/3 × )], or $8. Thus, the selling price of the special order must cover the additional shipping costs, and still result in a contribution margin of ( normal + $2 additional requirement). Therefore, a selling price of is required.

Answer 1

Part a:

Cost of each unit for 30000 additional units
Particulars	Amount ($)
Direct materials	8.00
Direct labour	6.00
Overhead (9 x 2/3)	6.00
Total variable costs	20.00
Add: Additional shipping costs	2.00
Relevant cost of each unit for additional 30000 units	22.00
Add: Profit	13.00
Unit price to be charged for 30000 units	35.00

	Units
Existing production	100000
Additional order	30000
Total	130000
Additional profit to be earn (130000 x 3) ($)	390000
Profit to be added to each unit in additional 30000 units (390000/30000) ($)	13

Particulars	Amount ($)	Amount ($)
Selling price		35.00
Less:
Direct materials	8.00
Direct labour	6.00
Overhead (9 x 2/3)	6.00
Total variable costs	20.00
Add: Additional shipping costs	2.00
Relevant cost of each unit for additional 30000 units		22.00
Contribution margin per unit		13.00

Part b:

Particulars	Amount ($)
Direct materials	8.00
Direct labour	6.00
Overhead (9 x 2/3)	6.00
Total variable costs	20.00
Add: Additional shipping costs	2.00
Relevant cost of each unit for additional 30000 units	22.00
Add: Profit to be earned	2.00
Selling price to be charged for each additional unit for 30000 units	24.00

Additional order	30000
Additional profit to be earn (60000 / 30000)	2
Profit to be added to each unit in additional 30000 units (390000/30000) ($)	2

                          

Particulars	Amount ($)	Amount ($)
Selling price		24.00
Less:
Direct materials	8.00
Direct labour	6.00
Overhead (9 x 2/3)	6.00
Total variable costs	20.00
Add: Additional shipping costs	2.00
Relevant cost of each unit for additional 30000 units		22.00
Contribution margin per unit		2.00