Answer to Part 1-a.
Contribution Margin per unit = Selling Price per unit – Variable Cost per unit
Variable Cost per unit = $10 + $4.50 + $2.30 + $1.20
Variable Cost per unit = $18
Contribution Margin per unit = $32 – $18 = $14
| Increased Sales in units (60,000 * 25%) |
15,000 |
| Contribution Margin per unit |
$14 |
| Incremental Contribution Margin |
$210,000 |
| Less: Added Fixed Selling Expense |
($80,000) |
| Incremental Net Operating Income |
130,000 |
Answer to Part 1-b.
Yes, the added Fixed Selling Expenses are justified, as it is increasing Net Operating Income by $130,000.
Answer to Part 2.
| Variable Manufacturing Cost per unit
($10 + $4.50 + $2.30) |
$16.80 |
| Import Duties per unit |
$1.70 |
| Permits and Licenses
(9,000 / 20,000) |
$0.45 |
| Shipping Cost per unit |
$3.20 |
| Break Even Price per unit |
$22.15 |
Answer to Part 3.
Relevant Unit Cost per unit is $1.20 which is the Variable Selling Expenses, as the cost incurred have already been incurred in producing the irregular units and fixed cost will remain same whether the units was produced or not. Therefore, the relevant cost will be the cost incurred to sell these units which is Variable Selling Expense per unit.
Answer to Part 4.
If Company is operating at 30% capacity for 2 months, then the
Units produced = 60,000 * 2/12 * 30% = 3,000
| Contribution Margin Lost
(3,000 * $14) |
($42,000) |
| Fixed Cost:
Fixed Manufacturing Overhead Cost
(300,000 * 2/12 * 40%)
Fixed Selling Cost
(210,000 * 2/12 * 20%) |
20,000
7,000 |
| Net Disadvantage of Closing the plant |
$15,000 |
