Davis Kitchen Supply produces stoves for commercial kitchens.The costs to manufacture and market the stoves at the company'snormal volume of 6,000 units per month are shown in the followingtable.
Unit manufacturing costs Variable materials $ 45 Variable labor70 Variable overhead 20 Fixed overhead 55 Total unit manufacturingcosts $ 190 Unit marketing costs Variable 20 Fixed 65 Total unitmarketing costs 85 Total unit costs $ 275 Unless otherwise stated,assume that no connection exists between the situation described ineach question; each is independent. Unless otherwise stated, assumea regular selling price of $400 per unit. Ignore income taxes andother costs that are not mentioned in the table or in the questionitself.
Required:
a. Market research estimates that volume could be increased to7,000 units, which is well within production capacity limitationsif the price were cut from $400 to $355 per unit. Assuming that thecost behavior patterns implied by the data in the table arecorrect. a-1. What would be the impact on monthly sales, costs, andincome? a-2. Would you recommend taking this action?
b. On March 1, the federal government offers Davis a contract tosupply 1,000 units to military bases for a March 31 delivery.Because of an unusually large number of rush orders from itsregular customers, Davis plans to produce 8,000 units during March,which will use all available capacity. If it accepts the governmentorder, it would lose 1,000 units normally sold to regular customersto a competitor. The government contract would reimburse its "shareof March manufacturing costs" plus pay a $55,000 fixed fee(profit). (No variable marketing costs would be incurred on thegovernment's units.) Assuming that the government's "share of Marchmanufacturing costs" will be the proportionate fixed manufacturingcost, what impact would accepting the government contract have onMarch income?
c. Davis has an opportunity to enter a highly competitiveforeign market. An attraction of the foreign market is that itsdemand is greatest when the domestic market's demand is quite low;thus, idle production facilities could be used without affectingdomestic business. An order for 2,000 units is being sought at abelow-normal price to enter this market. For this order, shippingcosts will total $35 per unit; total (marketing) costs to obtainthe contract will be $4,000. No other variable marketing costswould be required on this order, and it would not affect domesticbusiness. What is the minimum unit price that Davis should considerfor this order of 2,000 units?
d. An inventory of 460 units of an obsolete model of the stoveremains in the stockroom. These must be sold through regularchannels (thus incurring variable marketing costs) at reducedprices or the inventory will soon be valueless. What is the minimumacceptable selling price for these units?
e-1 A proposal is received from an outside contractor who willmake and ship 2,000 stoves per month directly to Davisâs customersas orders are received from Davisâs sales force. Davisâs fixedmarketing costs would be unaffected, but its variable marketingcosts would be cut by 15 percent for these 2,000 units produced bythe contractor. Davisâs plant would operate at two-thirds of itsnormal level, and total fixed manufacturing costs would be cut by30 percent. What in-house unit cost should be used to compare withthe quotation received from the supplier? (Round your answer to 2decimal places.)
e-2. Should the proposal be accepted for a price (that is,payment to the outside contractor) of $210 per unit?
f-1. A proposal is received from an outside contractor who willmake and ship 2,000 stoves per month directly to Davisâs customersas orders are received from Davisâs sales force. Davisâs fixedmarketing costs would be unaffected, but its variable marketingcosts would be cut by 15 percent for these 2,000 units produced bythe contractor. The idle facilities would be used to produce 1,600modified stoves per month for use in extreme climates. Thesemodified stoves could be sold for $445 each, while the costs ofproduction would be $270 per unit variable manufacturing expense.Variable marketing costs would be $45 per unit. Fixed marketing andmanufacturing costs would be unchanged whether the original 6,000regular stoves were manufactured or the mix of 4,000 regular stovesplus 1,600 modified stoves were produced. What in-house unit costshould be used to compare with the quotation received from theoutside contractor? (Round your answer to 2 decimal places.)
f-2. Should the proposal be accepted for a price of $210 perunit to the outside contractor?
Davis Kitchen Supply produces stoves for commercial kitchens.The costs to manufacture and market the stoves at the company'snormal volume of 6,000 units per month are shown in the followingtable.
Unit manufacturing costs Variable materials $ 45 Variable labor70 Variable overhead 20 Fixed overhead 55 Total unit manufacturingcosts $ 190 Unit marketing costs Variable 20 Fixed 65 Total unitmarketing costs 85 Total unit costs $ 275 Unless otherwise stated,assume that no connection exists between the situation described ineach question; each is independent. Unless otherwise stated, assumea regular selling price of $400 per unit. Ignore income taxes andother costs that are not mentioned in the table or in the questionitself.
Required:
a. Market research estimates that volume could be increased to7,000 units, which is well within production capacity limitationsif the price were cut from $400 to $355 per unit. Assuming that thecost behavior patterns implied by the data in the table arecorrect. a-1. What would be the impact on monthly sales, costs, andincome? a-2. Would you recommend taking this action?
b. On March 1, the federal government offers Davis a contract tosupply 1,000 units to military bases for a March 31 delivery.Because of an unusually large number of rush orders from itsregular customers, Davis plans to produce 8,000 units during March,which will use all available capacity. If it accepts the governmentorder, it would lose 1,000 units normally sold to regular customersto a competitor. The government contract would reimburse its "shareof March manufacturing costs" plus pay a $55,000 fixed fee(profit). (No variable marketing costs would be incurred on thegovernment's units.) Assuming that the government's "share of Marchmanufacturing costs" will be the proportionate fixed manufacturingcost, what impact would accepting the government contract have onMarch income?
c. Davis has an opportunity to enter a highly competitiveforeign market. An attraction of the foreign market is that itsdemand is greatest when the domestic market's demand is quite low;thus, idle production facilities could be used without affectingdomestic business. An order for 2,000 units is being sought at abelow-normal price to enter this market. For this order, shippingcosts will total $35 per unit; total (marketing) costs to obtainthe contract will be $4,000. No other variable marketing costswould be required on this order, and it would not affect domesticbusiness. What is the minimum unit price that Davis should considerfor this order of 2,000 units?
d. An inventory of 460 units of an obsolete model of the stoveremains in the stockroom. These must be sold through regularchannels (thus incurring variable marketing costs) at reducedprices or the inventory will soon be valueless. What is the minimumacceptable selling price for these units?
e-1 A proposal is received from an outside contractor who willmake and ship 2,000 stoves per month directly to Davisâs customersas orders are received from Davisâs sales force. Davisâs fixedmarketing costs would be unaffected, but its variable marketingcosts would be cut by 15 percent for these 2,000 units produced bythe contractor. Davisâs plant would operate at two-thirds of itsnormal level, and total fixed manufacturing costs would be cut by30 percent. What in-house unit cost should be used to compare withthe quotation received from the supplier? (Round your answer to 2decimal places.)
e-2. Should the proposal be accepted for a price (that is,payment to the outside contractor) of $210 per unit?
f-1. A proposal is received from an outside contractor who willmake and ship 2,000 stoves per month directly to Davisâs customersas orders are received from Davisâs sales force. Davisâs fixedmarketing costs would be unaffected, but its variable marketingcosts would be cut by 15 percent for these 2,000 units produced bythe contractor. The idle facilities would be used to produce 1,600modified stoves per month for use in extreme climates. Thesemodified stoves could be sold for $445 each, while the costs ofproduction would be $270 per unit variable manufacturing expense.Variable marketing costs would be $45 per unit. Fixed marketing andmanufacturing costs would be unchanged whether the original 6,000regular stoves were manufactured or the mix of 4,000 regular stovesplus 1,600 modified stoves were produced. What in-house unit costshould be used to compare with the quotation received from theoutside contractor? (Round your answer to 2 decimal places.)
f-2. Should the proposal be accepted for a price of $210 perunit to the outside contractor?
