PROBLEM 13-24 Relevant Cost Analysis in a Variety of Situations
Ovation Company has a single product called a Bit. The company normally produces and sells 60,000 Bits each year at a selling price of $32 per unit. The company's unit costs at this level of activity are given below:
Direct materials $10.00
Direct labor 4.50
Variable manufacturing overhead 2.30
Fixed manufacturing overhead 5.00 ($300,000 total)
Variable selling expenses 1.20
Fixed selling expenses 3.50 ($210,000 total)
Total cost per unit 26.50
A number of questions relating to the production and sale of Bits follow. Each question is independent.
1. Assume that Ovation Company has sufficient capacity to produce 90,000 Bits each year with-out any increase in fixed manufacturing overhead costs, The company could increase its sales by 25% above the present 60,000 units each year if it were willing to increase the fixed selling expenses by $80,000. Would the increased fixed selling expenses be justified?
2. Assume again that Ovation Company has sufficient capacity to produce 90,000 Bits each year. A customer in a foreign market wants to purchase 20,000 Bits. Import duties on the Bits would be $1.70 per unit, and costs for permits and licenses would be $9,000. The only selling costs that would be associated with the order would be $3.20 per unit shipping cost. Compute the per unit break-even price on this order.
3. The company has 1,000 Bits on hand that have some irregularities and are therefore considered to be "seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling price? Explain.
4. Due to a strike in its supplier's plant, Ovation Company is unable to purchase more material far the production of Bits. The strike is expected to last for two months. Ovation Company has enough material on hand to operate at 30% of normal levels for the two-month period. As an alternative, Ovation could close its shut down entirely for the two months. If the plant were dosed, fixed manufacturing overhead costs would continue at 60% of their normal level during the two-month period and the fixed selling expenses would he reduced by 20%. What would be the impact on profits of closing the plant for the two-month period?
5. An outside manufacturer has offered to produce Bits and snip them directly to Ovation's customers. If Ovation Company accepts this offer, the facilities that it uses to produce Bits would he idle; however, fixed manufacturing overhead costs would be reduced by 75%. Since the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer.
This solution provides an Excel file with the calculations for the relevant cost analysis.