The Melville Company produces a single product called a pong. Melville has the capacity to produce 60,000 pongs each year. If Melville produces at capacity, the per unit cost to produce and sell one pong as follows:
Direct Materials $15
Direct Labor $12
Variable Manufacturing Overhead $8
Fixed Manufacturing Overhead $9
Variable Selling Expense $8
Fixed Selling Expense $3
The regular selling price for one pong is $80. A special order has been received by Melville from Mowen Company to purchase 6,000 pongs next year. If this special order is accepted, the variable selling expense will be reduced by 75%. However, Melville will have to purchase a specialized machine to engrave the Mowen name on each pong in the special order. The machine will cost $9,000 and it will have no use after the special order i filled. The total fixed manufacturing overhead and selling expenses would be unaffected by this special order.
Assume Melville anticipates selling only 50,000 units of pong to regular customers next year. At what selling price for the 6,000 special order units would Melville be economically indifferent between accepting or rejecting the special order from Mowen? (that is the price at which the total contribution with or without the special order would be the same).
Assume Melville can sell 58,000 units of pong to regular customers next year and sale of 6000 units to this special order customer will result in losing the contribution on sales to regular customers at the regular price due to the 60,000 unit maximum production capacity. If Mowen Company offers to buy the special order units at $65 per unit, the effect of accepting the special order on the Melville's operating income next year should be a:
A. $36,000 increase
B. $11,000 increase
C. $192,000 increase
D. $47,000 increas
The solution examines Melville Company's unit cost problem for product pong.