Question

DAVIS KITCHEN SUPPLY 6,000 Units manufactured per month Regular selling price per unit 370 Unit manufacturing costs Variable materials Variable labor Variable overhead Fixed overhead Total unit manufacturing costs Unit marketing costs Variable Fixed Total unit marketing costs Total unit costs 210 95 305 7,000 325.00 Requirement a. information: Increase in volume (in units) New price after reduction Change in monthly sales Change in monthly costs Change in monthly income Requirement b. information: Government contract (in units) March production in units) Regular orders lost because of contract Fixed profit from government Government share of March manufacturing costs 1,000 8,000 1,000 50,000 $

Answer 1

ANSWER

As per the given question,

Before Price Reduction After Price Reduction Impact Sales Price 370.00 325.00 $ 6000 S 7000 Quantity Revenue Variable manufacturing Cost Variable Marketing Cost @ 25 Contribution Margin $ 22,20,000.00 $ 22,75,000.00 $ 55,000.00 Increase $ 9,00,000.00 $ 10,50,000.00 $ 1,50,000.00 Increase $ 1,50,000.00 $ 1,75,000.00 $ 25,000.00 Increase $ 11,70,000.00 $ 10,50,000.00 $ 1,20,000.00 Decrease $ 3,60,000.00 $ 3,60,000.00 S . $ 4,20,000.00 $ 4,20,000.00 S . $ 3,90,000.00 $ 2,70,000.00 $ 1,20,000.00 Decrease Fixed Manufacturing Cost Fixed Marketing Cost Operating Income

Variable manufacturing costs per unit = $50 + $75 +$ 25 = $150 Without Government Contract (8000) With Government Contract regular (8000- 1000) Government Total Revenue $ 29,60,000.00 $ 25,90,000.00 $ 2,45,000.00 $ 28,35,000.00 Variable manufacturing Cost Variable Marketing Cost @ 25 $ 12,00,000.00 $ 10,50,000.00 $ 2,00,000.00 $ 1,75,000.00 $ 15,60,000.00 $ 13,65,000.00 Contribution Margin $ 1,50,000.00 $ 12,00,000.00 $ - $ 1,75,000.00 $ 95,000.00 $ 14,60,000.00 $ 3,60,000.00 $ 4,20,000.00 $ 6,80,000.00 Fixed Manufacturing Cost $ 3,60,000.00 Fixed Marketing Cost 4,20,000.00 Operating Income 7,80,000.00

Government revenue = 1,000 x $150 + ($360,000 x 12.5%) = $50,000 = $245,000 government's share of March fixed manufacturing costs 1000/8000 = 12.5% Minimum Price Variable manufacturing Cost 150.00 Shipping Costs 40.00 order costs = 4000/2000 2.00 Total minimum price 192.00

Minimum acceptable Price * 25.00 The manufacturing costs are sunk. Any price in excess of the differential costs of selling the stoves will add to income. In this case, differential costs are $25 per unit variable marketing costs. Avoidable Costs Variable manufacturing cost saved 150 Per unit Variable marketing saved ($25 - ($25 x (1-20%)) Per unit Fixed manufacturing cost saved ($360,000 - (360000 *(1-30%))/ 2,000 units Per unit In-house cost savings Per unit

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