Short Term Decisions using Relevant Information

Becker Company produces and sells pens and markers. The following are the Becker Companys unit costs of manufacturing and marketing one of its pens, a high-style model, at an output level of 20,000 per month. The selling price of the pen is $6.

Manufacturing Cost
Direct Materials	$1.00
Direct manufacturing labor	$1.20
VOH cost	$0.80
FOH cost	$0.50
Marketing Costs
Variable	$1.50
Fixed	$0.90

The following independent situations and opportunities have arisen during the month. You have been asked to evaluate each. Make a recommendation regarding each opportunity. Write your recommendation to your supervisor, providing supporting calculations along with appropriate written short answer or executive memo, as appropriate.

A. The pen is usually produced and sold at the rate of 240,000 units per year (an average of 20,000 per month). The selling price is $6 per unit, which yields total annual revenues of $1,440,000. Total costs are $1,416,000 and operating income is $24,000, or $0.10 per unit. Market research estimates that unit sales could be increased by 10% if prices were cut to $5.80. What effect will these changes have on operating income? If price is reduced to $5.80, what level of sales are required to maintain the current operating income of $24,000?

B. Becker Company currently sells 20,000 pens per month. The Company receives a request to sell a special order of pens. The state government contracts for 5,000 pens. The government will reimburse ALL manufacturing costs plus a fixed fee of $1,000. No variable marketing costs are incurred on the government contract. If Becker has excess capacity for the special order, should they accept? What will be the effect of acceptance on Operating Income? How would your analysis change if Becker does NOT have excess capacity?

C. The company wants to enter a foreign market in which price competition is keen. Becker want to fulfill a one-time special order request for 10,000 pens. The shipping costs for the order will amount to $0.75 per unit, and the fixed costs of obtaining the contract will be $4,000. The company incurs no variable marketing costs other than shipping costs. Domestic business will be unaffected. What is the minimum selling price for this special order?

D. A proposal is received from an outside supplier who offers to make and ship the high-style pens directly to Beckers customers as sales orders are forwarded from Beckers sales staff. Beckers fixed marketing costs will be unaffected, but its variable marketing costs will be slashed by 20%. A portion of Beckers plant will be idle, but its fixed manufacturing overhead will continue at 50% of present levels. What is the minimum price Becker would be willing to pay the supplier, without changing current operating income.

Assume the same information about the external supplier above, except Becker has identified another company who is willing to rent the idle factory space. If the suppliers lowest acceptable price is $5, what is the minimum price should Becker charge the renter?