Contracting, cost allocations. Sprout Consulting has been working with Gemini Widgets to improve the widget production process. In the year ended December 31, 2006, Gemini produced and sold 450,000 widgets at $5.70 per widget. Variable costs were $2.90 per widget, and total fixed manufacturing costs were $1,350,000.

As a result of $prout’s analysis, Gemini has been able to produce 12 % more widgets in 2007. Gemini has also been able to reduce fixed costs by 25% and variable costs by 10%. The average selling price remained constant from 2006 to 2007.

$prout’s contract was as follows:

a $50,000 fixed fee 10% of the costs saved on production of up to 450,000 widgets

$0.10 on every widget produced over and above the year 2006 quantity of 450,000 regard¬

less of any cost savings being achieved.

Required 1. Was Gemini Widgets profitable in 2006? What was Gemini’s net income (loss)?

2. Calculate Gemini’s budgeted fixed cost per widget in 2006. What did you use for the budgeted denominator level? What was the total cost per widget?

3. Repeat requirements 1 and 2 for 2007. Do not take Sprout’s remuneration into account.

4. What is Sprout’s total remuneration for this assessment? What is Gemini’s operating income after deducting Sprout’s remuneration?