Question :

Mazeppa Corporation sells relays at a selling price of $28 per unit. The company's cost for every unit based on full capacity of 160,000 units, is as given:

Direct Materials.............$6
Direct Labor....................$4
Overhead (2/3 of which is variable).............$9

Mazeppa has been approached by a distributor in Montana offering to purchase a special order consisting of 30,000 relays. Mazeppa has the capacity to fill the order. Thus, it will incur an additional shipping cost of $2 for every relay it sells to the distributor.

a. Suppose that Mazeppa is currently operating at a level of 100,000 units. What unit price could it charge the distributor if it wishes to increase operating income by $5 for each unit included in the special order?

At a present operating level of 100,000 units, the company can't have to turn away any of its regular customers in order to fill the special order. If it wishes to increase operating income by $ per unit included in the special order, it only needs to produce a contribution margin per unit of $ . Thus, the selling price per unit included in the individual order is $ , as given below:

Special Sale
Selling price
$

Less: Direct materials
Direct labor
Variable overhead
Additional shipping costs
Contribution margin per unit $

b. Suppose that Mazeppa is presently operating at full capacity. To fill the special order, regular customers will have to be turned away. Now what unit price should it charge the distributor f it wishes to increase total operating income by $60,000 more than it would be without accepting the special order?

In order for the company to increase its operating income $60,000 above what it would be without the order, the contribution margin per unit added with the special order must be $2 per unit more ($2 × 30,000 units = $60,000) than the normal contribution margin. The normal contribution margin is the sales price, $28, less all variable costs [$ + $ + (2/3 × $ )], or $12. Thus, the selling price of the special order must cover the additional shipping costs, and still result in a contribution margin of $ ($ normal + $2 additional requirement). Hence, a selling price of $ is required, as given below:

Special Sale
Selling price $
Less: Direct materials
Direct labor
Variable overhead
Additional shipping costs
Contribution margin per unit $