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 13,560 units are shown in the following table:

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 $600 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 15,820 units, which is well within production capacity limitations if the price were cut from $600 to $525 per unit. Assuming that the cost behavior patterns implied by the data in the table are correct.

a-1. What would be the impact on quarterly sales, costs, and income?

a-2. Would you recommend taking this action?

b. On April 1, the federal government offers MCS a contract to supply 2,260 radios to military bases for a June 30 delivery. Because of an unusually large number of rush orders from its regular customers, MCS plans to produce 18,080 units during the second quarter, which for MCS runs from April 1 through June 30. This level of production will use all available capacity for the quarter. If it accepts the government order, MCS would lose 2,260 units normally sold to regular customers to a competitor. The government contract would reimburse its share of quarterly manufacturing costs plus pay a $64,000 fixed fee (profit). (No 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 4,000 radios is being sought at a below-normal price to enter this market. For this order, shipping costs will total $61 per unit; total (marketing) costs to obtain the contract will be $6,400. 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 4,000 radios?

d. An inventory of 500 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-1. A proposal is received from an outside contractor who will make and ship 4,000 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 25 percent for these 4,000 units produced by the contractor. MCS's plant would operate at two-thirds of its normal level, and total fixed manufacturing costs would be cut by 30 percent. What in-house unit cost should be used to compare with the quotation received from the supplier? Assume the payment to the outside contractor is $387.

e-2. Should the proposal be accepted for a price (that is, payment to the outside contractor) of $387 per unit?

f-1. A proposal is received from an outside contractor who will make and ship 4,000 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 25 percent for these 4,000 units produced by the contractor. The idle facilities would be used to produce 3,200 modified radios per month for use in high-security operations. These modified radios could be sold for $717 each, while the costs of production would be $437 per unit variable manufacturing expense. Variable marketing costs would be $77 per unit. Fixed marketing and manufacturing costs would be unchanged whether the original 13,560 regular radios were manufactured or the mix of 9,560 regular radios plus 3,200 modified radios were produced. What in-house unit cost should be used to compare with the quotation received from the outside contractor? Assume the payment to the outside contractor is $387.

f-2. Should MCS accept the proposal from the outside contractor at a price of $387 per unit?

Unit manufacturing costs Materials (variable) \begin{tabular}{r} $80 \\ 120 \\ 40 \\ 96 \\ \hline \end{tabular} Labor (variable) Overhead (variable portion) Overhead (fixed portion) Total unit manufacturing costs $336 Unit marketing costs Variable 40112 Fixed Total unit marketing costs 152488 Total unit costs