Molly Company has a single product called a lifter. The company currently produces and sells the following quantity of lifters each year at a selling price of $32 per unit. The company's unit costs at this level of activity are given below: Volume Production Sales 53,400 lifters Selling Price $ 32.00 $ Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable Selling expenses Fixed selling expenses 10.00 4.50 2.30 5.00 $ 1.20 3.50 $ 26.50 267,000 total 186,900 total A number of questions relating to the production and sale of lifters follow. Each question is independent. Required: 1. Assume that Molly Company has sufficient capacity to produce 90,000 lifters each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the current quantity of units each year if it were willing to increase the fixed selling expenses by $80,000. Determine the effect on operating income of this proposal. Total production capacity 90,000 lifters Current volume of production and sales 53,400 lifters Increase in sales 25% Fixed selling expenses increase 80,000 Increase (decrease) in Operating Income 2. The company has 1,000 lifters on hand that have some irregularities and are therefore considered to be seconds. Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling price? Briefly explain Relevant costing PART 2 Nimesh has been working full-time as store manager in Kemptville, Ontario. He has applied for admission to the Masters - Engineering at Carleton University. If accepted, he will resign from his job and move to Ottawa, Ontario. Nimesh has assembled the following data to make the decision: Nimesh's annual salary as a store manager University tuition and fees University books and supplies expense Monthly living expense in Kemptville Monthly living expense in Ottawa Monthly auto expenses in Kemptville Monthly auto expenses in Ottawa Cost of new clothes purchased just prior to resigning Moving expenses 46,700 23,700 3,000 800 1,600 350 350 620 3,500 $ $ $ $ 18 12 Number of months to complete the Masters program Number of months in one year Required: a) Calculate the following in the context of Nimesh's decision of earning an Masters degree if it will take him 18 months to complete the program: ) Total sunk costs (if any) (ii) Total differential or incremental costs (if any) (iii) Total opportunity costs (if any) b) What is your best estimate of the total cost to Nimesh of earning an Masters degree if it will take him 18 months to complete the program? c) Suppose you are Nimesh. What two specific additional information would you need in order to make rational decision to pursue and successfully complete the Masters program at Carleton? Explain
