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.
Assume that Mazeppa is currently operating at a level of 100,000 units. What unit price should it charge the distributor if it wishes to increase operating income by $5 for each unit included in the special order?(Do not round intermediate calculations.)

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 ________, as shown below:

Selling price: credit ________

Less: Direct labor________ Debit

Variable overhead _________ Debit

Additional Shipping Costs __________ Debit

Contribution Margin per unit _________

b.
Assume that Mazeppa is currently operating at full capacity. To fill the special order, regular customers will have to be turned away. Now what unit price should it charge the distributor if it wishes to increase total operating income by $60,000 more than it would be without accepting the special order? (Do not round intermediate calculations.)

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 ($2x30,000 units= $60,000) than the normal contribution margin. The normal contribution margin is the sales price, $28, less all variable costs [ ______ +______ +(2/3x________)], 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, as shown belwo:

Selling price credit ___________

Less: Direct materials __________ debit

Variable overhead _________ debit

Additional Shipping costs __________ debit

Contribution margin per unit ____________

Answer 1

Solution and explanantion:

Answer A

The Relevant cost of special order

Direct material 6

Direct Labor 4

Overhead (9*2/3) 6

Shipping Cost 2

Total cost 18

Add: Profit Increase in operating Income 3

Therefore, the Price to be charged 21

Answer B

The relevant total cost (18*30000) 540000

The loss of contribution magin (28-18)*30000 300000

The desired Increase in operating Income 60000

The total price 900000

The No.of Units 30000

Therefore, the Price to be charged per unit 30