New Raritan Manufacturing

New Raritanhas five categories of costs: direct material, direct labor, factory overhead, administration, and distribution. Material and labor are direct costs, meaning they go into the product, and vary directly, or in line,with production volumes. Factory overhead, administration, and distribution are mixed, meaning that they have both a variable component and a fixed component. For example, factory overhead'svariable component is $15 times 12,000 units = $180,000 plus a $45,000 fixed component= $225,000 total.

New Raritan Manufacturing
Revenue		12000	units	$ 55.00	per unit	$ 660,000
Full capacity sales if now at 80% of capacity	15000	units
		Fixed Cost		Variable Cost/ Unit			Perunit cost
Direct Material			6		72000
Direct Labor				12		144000
Factory OH		45000		15		225000
Admin		48000		3		84000
Distrib.		57000		4		105000
Total		150000		40		630000	$ 52.50
					OperatingProfit	$ 30,000

From this analysis, we can see that New Raritan is expecting to sell 12,000 units at $55.00 each and expects to earn an operating profit of $30,000. The cost of a unit manufactured is $52.50, calculated by dividing the total costs of $630,000 by the 12000 units produced. We can also note that, at a production level of 12000 units, they are operating at 80% of capacity. That means full capacity production must be 15000 units, calculated by 12000/0.80.

Please use the above analysis and respond to the following questions.

1. Since the current operating income is a positive $30.000, New Raritan is obviously operating above its breakeven point. To understand how close, they are to their breakeven, calculate the breakevenpoints in terms of units and sales dollars. What percentage change in sales would put New Raritanat its breakevenpoint?
2. If New Raritansuddenly closed and they had no sales, conceptually, how much would they lose per year?
3. The sales department is confident that a price cut from $55.00 to $53.00 for all sales would generate 2000 additional unit sales, for a total of 14,000 units. What would the new breakeven point and percent decline from the new expected sales level? Should this proposal be accepted? Why?
4. A special business opportunity comes up to sell an additional 2000 units in a geographic area of the world where New Raritan has no distributor at a price of $39.00 per unit. Should this proposal be accepted or not? Why?
5. The overseas buyer reconsiders and offers a price of $46.00 per unit for 2000 units. The accounting department notes that the price is still significantly below the $52.50 full absorption unit cost. Should this offer be rejected? Why or why not?
6. If the overseas buyer reconsiders and wants to increase the order to 4000 units at $46.00, should this order be accepted or not? Why?
7. Difficult economic times hit New Raritan'sindustry and expected sales are slashed to 9000 units. What is the expected operating profit at this level of sales, assuming the price of $55.00? If it is expected that the 12000 sales level could be maintained with a price cut from $55 to $52, should this proposal be accepted? Why or why not?
8. What general rules can you derive from this exercise relative to the contribution margin and the pricing?