Question $3$: Decision Making

Kava Inc. manufactures industrial components. One of its products, which is used in the construction of

industrial air conditioners, is known as K$65.$ Data concerning this product are given below:

Per unit

Selling price..............................................................$$180$

Direct materials..........................................................$$29$

Direct labor...................................................................$$5$

Variable manufacturing overhead.................................$$4$

Fixed manufacturing overhead...................................$$21$

Variable selling expense...............................................$$2$

Fixed selling and administrative expense...................$$17$

The above per unit data are based on annual production of $4,000$ units of the component. Direct labor can be considered a variable cost.

$1.$ Prepare a contribution margin format income statement based on the annual

information above.

$2.$The company has received a special, one$-$time$-$only order for $500$ units of component

K$75,$ a modified version of component K$65,$ that would be purchased at reduced price of $$100$ per unit. There would be no variable selling expense for this special order, but they would incur a rental expense of $$15,000$ for a special machine, as well as the additional expenses listed below.

Per unit

Additional direct materials........................................... $$5$

Additional direct labor.................................................. $$1$

Additional variable manufacturing overhead........... $$0\mathrm{.}75$

Assuming that Kava has excess capacity and can fill the order without cutting back on the

production of any product, should this order be accepted? Please provide supporting calculations.

$3.$ Now assume that Kava has no excess capacity and this special order would require

using a constrained resource, which could be used instead to produce products with a total

contribution margin of $$11,000.$ What is the minimum price per unit on the special order below which the company should not go$?$