Question 1
International Printer Machines (IPM) builds three computer printer models: Alpha, Beta, and Gamma. Information for these three products is as follows:
Alpha | Beta | Gamma | Total | |
Selling price per unit | $250 | $400 | $1 500 | |
Variable cost per unit | $80 | $200 | $800 | |
Expected unit sales (annual) | 12,000 | 6,000 | 2,000 | 20,000 |
Sales mix | 50 percent | 40 percent | 10 percent | 100 percent |
Total annual fixed costs are $5,000,000. Assume the sales mix remains the same at all levels of sales.
Required:
- Calculate the weighted average unit contribution margin, assuming a constant sales mix.
- How many units of each printer must be sold to break even?
- i) Explain what is margin of safety ii) Calculate in sales units the margin of safety for IPM, assuming projected sales are 25,000 units?
Question 2
GEM Limited has a single product Flicks. The company normally produces and sells 80,000 units of Flicks each year at a price of $240 per unit. The company’s unit costs at this level of activity are as follow:
Direct material | $57.00 |
Direct labour | 60.00 |
Variable manufacturing overhead | 16.80 |
Fixed manufacturing overhead | 30.00 |
Variable selling and administrative costs | 10.20 |
Fixed selling and administrative costs | 27.00 |
Total unit cost | $201.00 |
GEM has sufficient capacity to produce 100 000 units of Flicks a year without any increase in fixed manufacturing overhead.
Required:
- GEM has an opportunity to sell 10 000 units to an overseas customer. Import duties and other special costs associated with this order would total $42 000. The only selling costs that would be associated with the order would be a shipping cost of $9.00 per unit. What would be the minimum acceptable unit price for GEM to consider this order? (hint: GEM would not accept the order if it would reduce the company’s profit)
- The company has 200 units of Flicks on hand that were produced two months ago. Due to blemishes on the units, it will be impossible to sell these units at the normal price. If the company wishes to sell them through regular sales channels, what would be the relevant cost for setting the minimum price? Explain.
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