Davis Kitchen Supply produces stoves for commercial kitchens. The costs to manufacture and market the stoves at the company's normal volume of 6,000 units per month are shown in the following table:

Unit manufacturing costs
Variable materials	$	57
Variable labor		82
Variable overhead		32
Fixed overhead		67
Total unit manufacturing costs				$	238
Unit marketing costs
Variable		32
Fixed		77
Total unit marketing costs					109
Total unit costs				$	347

Unless otherwise stated, assume that no connection exists between the situation described in each question; each is independent. Unless otherwise stated, assume a regular selling price of $384 per unit. Ignore income taxes and other costs that are not mentioned in the table or in the question itself.

Required:

a. Market research estimates that volume could be increased to 7,000 units, which is well within production capacity limitations if the price were cut from $384 to $339 per unit. Assume that the cost behavior patterns implied by the data in the table are correct.

a-1. What would be the impact on monthly sales, costs, and income? (Select option "increases" or "decrease", keeping price before reduction as the base. Select "none" if there is no effect.)

	Before Price Reduction	After Price Reduction	Impact
Sales price
Quantity
Revenue
Variable manufacturing costs
Variable marketing costs
Contribution margin
Fixed manufacturing costs
Fixed marketing costs
Income

a-2. Would you recommend taking this action?

	Yes
	No

b. On March 1, the federal government offers Davis a contract to supply 1,000 units to military bases for a March 31 delivery. Because of an unusually large number of rush orders from its regular customers, Davis plans to produce 8,000 units during March, which will use all available capacity. If it accepts the government order, it would lose 1,000 units normally sold to regular customers to a competitor. The government contract would reimburse its "share of March manufacturing costs" plus pay a $43,000 fixed fee (profit). (No variable marketing costs would be incurred on the government's units.) Assuming that the government's "share of March manufacturing costs" will be the proportionate fixed manufacturing cost, what impact would accepting the government contract have on March income?

	Without Government Contract	With Government Contract			Impact
		Regular	Government	Total
Revenue
Variable manufacturing costs
Variable marketing costs
Contribution margin
Fixed manufacturing costs
Fixed marketing costs
Income

c. Davis has an opportunity to enter a highly competitive foreign market. An attraction of the foreign market is that its demand is greatest when the domestic market's demand is quite low; thus, idle production facilities could be used without affecting domestic business. An order for 2,000 units is being sought at a below-normal price to enter this market. For this order, shipping costs will total $47 per unit; total (marketing) costs to obtain the contract will be $6,000. No other variable marketing costs would be required on this order, and it would not affect domestic business. What is the minimum unit price that Davis should consider for this order of 2,000 units?

Minimum unit price

d. An inventory of 460 units of an obsolete model of the stove remains in the stockroom. These must be sold through regular channels (thus incurring variable marketing costs) at reduced prices or the inventory will soon be valueless. What is the minimum acceptable selling price for these units?

Minimum selling price

per unit