Problem $4-54($Static$)$ Comprehensive Differential Costing Problem $($LO $4-1,2,4)$

Medbury Communications Systems $($MCS$)$ produces mobile radios for arctic and other harsh environments. The costs to manufacture and market the radios at the company$$s normal quarterly volume of $12,000$ units are shown in the following table:

Unit manufacturing costs

Materials $($variable$)$ $ $80$

Labor $($variable$)120$

Overhead $($variable portion$)40$

Overhead $($fixed portion$)96$

Total unit manufacturing costs $ $336$

Unit marketing costs

Variable $40$

Fixed $112$

Total unit marketing costs $152$

Total unit costs $ $488$

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 $14,000$ 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 $2,000$ 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 $16,000$ 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 $2,000$ units normally sold to regular customers to a competitor. The government contract would reimburse its $$share of quarterly manufacturing costs$$ plus pay a $$90,000$ fixed fee $($profit$).($No variable marketing costs would be incurred on the government$$s 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.$)$

On April $1,$ the federal government offers MCS a contract to supply $2,000$ 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 $16,000$ 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 $2,000$ units

normally sold to regular customers to a competitor. The government contract would reimburse its "share of quarterly manufacturing costs" plus pay a

$$90,000$ fixed fee $($profit$).($No variable marketing costs would be incurred on the government's 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."$)($Select

option "increase" or "decrease", keeping without government contract as the base. Select "none" if there is no effect.$)$