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$8

Direct labor6

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 $3 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 increase in selling price?

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?

Reg A1

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 $3 per unit?

Special Sale

Selling price

Less: Direct Materials

Direct labor

Variable overhead

Additional shipping costs

Contribution margin per unit

Req A2

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?

At a current operating level of 100,000 units, the company will not have to turn away any of its regular customers in order to fill the special order. If it wishes to increase operating income by__________

Per unit included in the special order, it only needs to generate a contribution margin per unit of_________ Thus, the selling price per unit included in the special order is________

Req B1

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?

Special Sale

Selling price

Less: Direct Materials

Direct labor

Variable overhead

Additional shipping costs

Contribution margin per unit

Req B2

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?

In order for the company to increase its operating income $60,000 above what it would be without the order, the contribution margin per unit included with the special order must be $2 per unit more ($2*30,000 units= $60,000) than the normal contribution margin. The normal contribution margins is the sales price, $28, less all variable costs [+ (2/3 *)], or$8. Thus, the selling price of the special order must cover the additional shipping costs, and still result in a contribution margin of ___________ (______ normal + $2 additional requirement). Therefore, a selling price of ___________ is required.