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Relevant Cost Analysis in a Variety of Situations

Antoine Company has a single product called Zero. The company normally produces and sells 80,000 Zero's each year at a selling price of $40 per unit. The company's unit cost at this level of activity is given below:

Direct materials $9.50
Direct Labor 10.00
Variable manufacturing
Overhead 2.80
Fixed manufacturing
Overhead 5.00 ($400,000 total)
Variable selling expenses 1.70
Fixed selling expenses 4.50 ($360,000 total)

Total cost per unit $33.50

1. Assume that Antoine has sufficient capacity to produce 100,000 Zero's each year without any increase in fixed manufacturing overhead cost. The company could increase sales by 25% above the present 80,000 units each year if it were willing to increase the fixed selling expenses by $150,000. Would the increase fix selling expenses by justified?
2. Assume that the company has sufficient capacity to produce 100,000 Zero's each yr. The company has an opportunity to sell 20,000 units in an overseas market. Import duties, foreign permits, and other special costs associated with the order would total $14,000. The only selling costs that would be associated with the order would be $1.50 per unit shipping cost. Compute the per unit break-even price on this order.
3. One of the materials used in the production of Zero is obtained from a foreign company. Civil unrest in the supplier's country has caused a cutoff in material shipments that is expected to last for three months. Antoine has enough material on hand to operate at 25% of normal levels for the three month period. As an alternative, the company could close the plant down entirely for the three months. Closing the plan t can reduce fixed manufacturing overhead cost by 40% during the 3 month period and the fixed selling expenses would continue at two-thirds of their normal level. What would be the impact on profits of closing the plant for the 3 month period?
4. The company has 500 Zeros on hand that were produced last month and have small blemishes. Due to the blemishes, it would be impossible to sell the units at a normal price. If the company wishes to sell them through regular distribution channels, what unit cost figure is relevant for setting a minimum selling price? Explain.
5. An outside manufacturer has offered to produce Zero and ship them directly to Antoine's customers. If Antoine's accepts the offer, the facilities that it uses to produce Zero would be idle; fixed manufacturing overhead cost would continue at 30%. Since the outside manufacturer would pay for all shipping costs the variable selling expenses would be reduced by 60%. Compute the unit cost that is relevant for comparison to the price quoted by the outside manufacturer.


Solution Summary

This solution conducts a cost analysis by determining fixed expenses, breakeven prices, reduction in profits, minimum selling price, and the per unit costs. References are included.