Allen and McConnell, Inc. (A & M) manufactures a variety of consumer products which they sell to retailers around the country. One of their products, Pogo, normally wholesales for $180/unit. Pogo is manufactured in a separate facility that currently operates at 7,000 units/mo below capacity. Pogo costs $136/unit to manufacture: $36 of direct materials, $25 of direct labor, and $75 of overhead (applied at 300% of direct labor). The overhead pool is 80% fixed and 20% variable. A new customer, Enormous Mart, has approached A & M about purchasing a large quantity of Pogo: 8,000 units/mo for each of the next six months. Enormous Mart has offered to pay $110/unit. Because of a small design modification, A & M will incur $50,000 in one-time set up costs, which will result in a reduction of $4/unit in raw materials costs. Because the order is negotiated through headquarters, the normal 10% sales commission will not be paid.
a. Is the order profitable for A & M? Show your calculations.
b. What other factors should A & M consider in deciding whether to accept the order?
See attached file.
present marginal cost statement enormous mart order 8000 units
per unit total selling price per unit 110 880000
sales 180 1260000
less variable cost per unit
direct material 36 252000 direct material 32 256000
direct labour 25 175000 direct labour 25 200000 total variable overhead 105000
The solution contains marginal cost statement to determine the profitability and under what conditions an export order below the current selling price can be accepted.