Exercise 21.12 (Static) Pricing a Special Order (LO21-1, LO21-2, LO21-3)

Mazeppa Corporation sells relays at a selling price of $28 per unit. The company's cost per unit, based on full capacity of 160,000 units, is as follows:

Direct materials	$	6
Direct labor		4
Overhead (2/3 of which is variable)		9

Mazeppa has been approached by a distributor in Montana offering to buy a special order consisting of 30,000 relays. Mazeppa has the capacity to fill the order. However, it will incur an additional shipping cost of $2 for each relay it sells to the distributor.

a-1. Assume that Mazeppa is currently operating at a level of 100,000 units. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $2 per unit?

a-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the unit price charged to the distributor?

b-1. Assume that Mazeppa is currently operating at full capacity. Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $60,000 more than it would be without accepting the special order?

b-2. What is your interpretation of the changes to the contribution margin per unit and the operating income on account of the unit price charged to the distributor?

a-1

		Special Sale
Selling price		$ XX
Less: Direct materials	6
Direct labor	4
Variable overhead	6
Additional shipping	2	18
Contribution margin per unit		XX

I'd like to know the number XX. FYI: I tried selling price of $24 and that was not the right answer.

My trial for a-1: -Overhead (2/3 of which is variable) means overhead (1/3 of which is fixed) -When based on full capacity of 160,000 units, variable overhead is 9(2/3)=$6 -So, fixed overhead is $3. Which means Fix overhead of the Mazeppa is $480,000. When Mazeppa is operating at a level of 100,000 units, the fixed overhead per unit is $4.8. Selling price of $28 will generate $12 contribution margin. Operating income is 12-4.8=$7.2. -I don't get the question of "Show the calculation for the unit price to charge the distributor which will generate an increase in operating income of $2 per unit?" -Does this mean the operating income of 100,000 units or additional 30,000 units or 130,000 units? -Does increase in operating income of $2 mean O.I of $7.2 increase to $9.2 for 100,000 units? or 130,000 units? Or only additional 30,000 units increase to $9.2? -Or only additional 30,000 units to generate $2 per unit rather than $9.2?

I think the key is how much you allocate the fixed overhead to each unit...