Additional Instructions:

Show all calculations and include clear explanations.

Case Problem:

Below are The Great Pen Company unit costs of manufacturing and marketing a high-style pen at an estimated out-put level of 20,000 units per month.

Manufacturing costs:

Direct materials $1.00

Direct manufacturing labor 1.20

Variable manufacturing indirect costs 0.80

Fixed manufacturing indirect costs 0.50

Marketing costs:

Variable $1.50

Fixed 0.90

REQUIRED:

Each situation is independent from the others. Unless stated otherwise, assume each pen sells for $6.00 each. Choose the best answer to each question. Show all calculations. You must show all your work to receive credit for this assignment. Each question is worth 4 pts.

1.What is the unit cost of each pen if The Great Pen Company produces only 10,000 total pens per month?

a.$3.00

b.$4.00

c.$5.00

d.$2.20

e.$5.90

2.A contract with the government for 5,000 pens calls for the reimbursement of all manufacturing costs plus a fixed fee of $1,000. No variable marketing costs are incurred on the government contract. You are asked to compare the following two alternatives:

Sales Each Month to Alternative A Alternative B

Regular customers 15,000 pens 15,000 pens

Government 0 pens 5,000 pens

On a per month basis, operating income under Alternative B is greater than under Alternative A by

a.$1,000

b.$2,500

c.$3,500

d.$300

e.None of these.

3.Assume the same data with respect to the government contract as in requirement 2 except that the two alternatives to be compared are:

Sales Each Month to Alternative A Alternative B

Regular customers 20,000 pens 15,000 pens

Government 0 pens 5,000 pens

On a per month basis, operating income under Alternative B relative to that under Alternative A is

a.$4,000 less

b.$3,000 greater

c.$6,500 less

d.$500 greater

e.None of these

4.The company received a one-time-only offer for 10,000 units from a company in a foreign market in which price competition is keen. The company expects that shipping costs for this special order will amount to only $0.75 per unit. However, the company will incur an additional $4,000 fixed marketing costs due to meeting complex foreign market regulations. The company incurs no variable marketing costs other than the shipping costs. Domestic business will be unaffected by the offer. The selling price per unit to break-even is

a.$3.50

b.$4.15

c.$4.25

d.$3.00

e.$5.00

5.The company as an inventory of 1,000 units of pens that must be sold immediately at reduced prices. Otherwise, the inventory will be worthless. The unit cost that is relevant for establishing the minimum selling price is

a.$4.50

b.$4.00

c.$3.00

d.$5.90

e.$1.50

6.A proposal was received from an outside supplier who will make and ship these high-style pens directly to The Great Pen Companys customers as sales are forwarded from companys sales staff. Fixed marketing costs will be unaffected, but the companys variable marketing costs will be slashed by 20%. The companys plant will be idle, but its manufacturing overhead will continue at 50% of present levels. What is the maximum price per unit the company would be willing to pay the outside supplier? (Hint: Calculate the unit cost saving if no longer making the part.)

a.$4.75

b.$3.95

c.$2.95

d.$5.35

e.$3.55