Question

Ovation Company has a single product called a Bit. The company normally produces and sells 60,000 Bits each year at a selling price of $45 per unit. The company's unit costs at this level of activity are given below: Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling expenses Fixed selling expenses $11.10 6.90 3.00 4.20 ($252,000 total) 6.00 4.50($270,000 total) Total cost per unit $35.70 A number of questions relating to the production and sale of Bits follow. Each question is independent. Required: 1. Assume that Ovation Company has sufficient capacity to produce 90,000 Bits each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the current 60,000 units each year if it were willing to increase the fixed selling expenses by $99,000. a. Calculate the incremental net operating income. Incremental operating income b. Would the increased fixed selling expenses be justified? Yes No 2. Assume again that Ovation Company has sufficient capacity to produce 90,000 Bits each year. A customer in a foreign market wants to purchase 15,000 Bits. Import duties on the Bits would be $1.70 per unit, and costs for permits and licences would be $6,750. Both import duties and permits and licenses will be paid by Ovation. The only selling costs that would be associated with the order are $2.40 per unit shipping cost. Compute the per unit break-even price on this order. (Do not round your intermediate calculations. Round your answer to 2 decimal places.) Break-even price per unit 3. The company has 1,000 Bits on hand that have some irregularities and are therefore considered to be "seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.) Relevant unit cost 4. Due to a strike in its supplier's plant, Ovation Company is unable to purchase more material for the production of Bits. The strike is expected to last for two months. Ovation Company has enough material on hand to operate at 30% of normal levels for the two-month period. As an alternative, Ovation could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 60% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? (input the amount as a positive value. Do not round your intermediate calculations.) of closing the plant 5. An outside manufacturer has offered to produce Bits and ship them directly to Ovation's customers. If Ovation Company accepts this offer, the facilities that it uses to produce Bits would be idle; however, fixed manufacturing overhead costs would be reduced by 75%. Since the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their current amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer. (Do not round your intermediate calculations. Round your answer to 2 decimal places.) Total avoidable unit cost

Answer 1

To assist the Ovation Company with financial decisions, several calculations need to be made involving incremental net operating income, break-even price, relevant unit costs for 'seconds', the impact of closing the plant, and avoidable unit costs for outsourcing production.

Step-by-step explanation:

The scenario presented involves Ovation Company which produces and sells a product called a Bit.

For question 1a, to calculate the incremental net operating income, you need to consider the incremental revenues and costs from increasing sales by 25%.

At $45 per unit selling price and 60,000 units currently sold, the incremental increase would be 15,000 units (25% of 60,000), thus increasing sales by $675,000. The incremental fixed selling expenses are $99,000, and variable costs per unit would remain the same.

So, the incremental net operating income is the additional $675,000 revenue minus the $99,000 additional fixed costs and the increased variable costs for the additional units.

For question 1b, the increased fixed selling expenses would be justified if the incremental net operating income is positive, indicating that the company will gain more from the increased sales than it spends on the additional expenses.

For question 2, the break-even price per unit is the price at which total costs, including variable costs per unit plus additional costs (import duties and permits and licenses divided by the number of units), equals total revenue.

Shipping costs are also included in the costs here but not in the break-even calculation since they're already accounted for with the foreign customer.

For question 3, when setting a minimum selling price for 'seconds,' the relevant unit cost figure would be the variable costs (direct materials, direct labour, and variable manufacturing overhead) as these are the costs that would be avoided if the units were not sold.

For question 4, the impact on profits of closing the plant is calculated by considering saving 40% of fixed manufacturing overhead costs and reducing fixed selling expenses by 20% for the two months while not generating any revenue from production or sales.

For question 5, to compute the unit cost relevant for comparison to the price quoted by the outside manufacturer, only avoidable costs are considered. This includes variable costs and any fixed costs that would be saved due to not producing in-house.