Question

Finch Modems has excess production capacity and is considering the possibility of making and selling paging equipment. The following estimates are based on a production and sales volume of 1,600 pagers. Unit-level manufacturing costs are expected to be $26. Sales commissions will be established at $1.60 per unit. The current facility-level costs, including depreciation on manufacturing equipment ($66,000), rent on the manufacturing facility ($56,000), depreciation on the administrative equipment ($13,800), and other fixed administrative expenses ($74,950), will not be affected by the production of the pagers. The chief accountant has decided to allocate the facility-level costs to the existing product (modems) and to the new product (pagers) on the basis of the number of units of product made (i.e., 5,600 modems and 1,600 pagers). Required a. Determine the per-unit cost of making and selling 1,600 pagers. (Do not round intermediate calculations. Round your answer to 3 decimal places.) b. Assuming the pagers could be sold at a price of $40 each, should Finch make the pagers

Answer 1

a). Per unit cost = $ 159.31

b). Yes, Finch Modems should make the pagers.

Step-by-step explanation:

a). Facility level cost proposed to be allocated to the pager line

`$=(1600)/(5600+1600) * (66,000+56,000+13,800+74,950)$`

= 0.22 + 210750

= $ 210750.22

Facility cost per unit of pager =
`$(210750.22)/(1600)$` = $ 131.71

Cost per unit of pager = $ 26 + $ 1.60 + $ 131.71

= $ 159.31

b). At the selling price of $ 40 per unit, the pager line will result in an operational loss, the profit for the company as a whole will increase if it decides to manufacture the pagers.

Contribution margin per unit of pager = $ 40 - ( $ 26 + $ 1.60)

= $ 15.6

Total contribution margin per unit of pager = 1600 x $ 15.6

= $ 24,960

The net operating income for the company would increase by $ 24.960 if the pagers are added to its product portfolio.

Hence Finch Modems should make the pagers.