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Medbury Communications Systems ( MCS ) produces mobile radios for arctic and other harsh environments. The costs to manufacture and market the radios at the
Medbury Communications Systems MCS produces mobile radios for arctic and other harsh environments. The costs to manufacture and market the radios at the companys normal quarterly volume of units are shown in the following table:
Unit manufacturing costs
Materials variable $
Labor variable
Overhead variable portion
Overhead fixed portion
Total unit manufacturing costs $
Unit marketing costs
Variable
Fixed
Total unit marketing costs
Total unit costs $
Required:
Assume that no connection exists among the situations described in each question below unless otherwise stated. Each is independent. Also assume a regular selling price of $ per unit unless otherwise stated. Ignore income taxes and other costs that are not mentioned in the accompanying table or in the question itself.
a Market research estimates that quarterly volume could be increased to units, which is well within production capacity limitations if the price were cut from $ to $ per unit. Assuming that the cost behavior patterns implied by the data in the table are correct.
a What would be the impact on quarterly sales, costs, and income?
a Would you recommend taking this action?
b On April the federal government offers MCS a contract to supply radios to military bases for a June delivery. Because of an unusually large number of rush orders from its regular customers, MCS plans to produce units during the second quarter, which for MCS runs from April through June This level of production will use all available capacity for the quarter. If it accepts the government order, MCS would lose units normally sold to regular customers to a competitor. The government contract would reimburse its share of quarterly manufacturing costs plus pay a $ fixed fee profitNo variable marketing costs would be incurred on the governments units. What impact would accepting the government contract have on second quarter income? Hint: Part of the question is to figure out the meaning of share of quarterly manufacturing costs.
c MCS 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 markets demand is quite low; thus, idle production facilities could be used without affecting domestic business. An order for radios is being sought at a belownormal price to enter this market. For this order, shipping costs will total $ per unit; total marketing costs to obtain the contract will be $ 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 MCS should consider for this order of radios?
d An inventory of units of an obsolete model of the radio 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?
e A proposal is received from an outside contractor who will make and ship radios per quarter directly to MCSs customers as orders are received from MCSs sales representatives. The fixed marketing cost at MCS would be unaffected, but its variable marketing costs would be cut by percent for these units produced by the contractor. MCSs plant would operate at twothirds of its normal level, and total fixed manufacturing costs would be cut by percent. What inhouse unit cost should be used to compare with the quotation received from the supplier? Assume the payment to the outside contractor is $
e Should the proposal be accepted for a price that is payment to the outside contractor of $ per unit?
f A proposal is received from an outside contractor who will make and ship radios per quarter directly to MCSs customers as orders are received from MCSs sales representatives. The fixed marketing cost at MCS would be unaffected, but its variable marketing costs would be cut by percent for these units produced by the contractor. The idle facilities would be used to produce modified radios per month for use in highsecurity operations. These modified radios could be sold for $ each, while the costs of production would be $ per unit variable manufacturing expense. Variable marketing costs would be $ per unit. Fixed marketing and manufacturing costs would be unchanged whether the original regular radios were manufactured or the mix of regular radios plus modified radios were produced. What inhouse unit cost should be used to compare with the quotation received from the outside contractor? Assume the payment to the outside contractor is $
f Should MCS accept the proposal from the outside contractor at a price of $
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