Davis Kitchen Supply produces stoves for commercial kitchens. The costs to manufacture and market the stoves at the company's normal volume of 6,000 units per month are shown in the following table.
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| Unit manufacturing costs |
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| Variable materials |
$ |
41 |
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| Variable labor |
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66 |
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| Variable overhead |
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16 |
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| Fixed overhead |
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51 |
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| Total unit manufacturing costs |
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$ |
174 |
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| Unit marketing costs |
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| Variable |
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16 |
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| Fixed |
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61 |
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| Total unit marketing costs |
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77 |
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| Total unit costs |
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$ |
251 |
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Unless otherwise stated, assume that no connection exists between the situation described in each question; each is independent. Unless otherwise stated, assume a regular selling price of $408 per unit. Ignore income taxes and other costs that are not mentioned in the table or in the question itself.
On March 1, the federal government offers Davis a contract to supply 1,000 units to military bases for a March 31 delivery. Because of an unusually large number of rush orders from its regular customers, Davis plans to produce 8,000 units during March, which will use all available capacity. If it accepts the government order, it would lose 1,000 units normally sold to regular customers to a competitor. The government contract would reimburse its "share of March manufacturing costs" plus pay a $59,000 fixed fee (profit). (No variable marketing costs would be incurred on the government's units.) Assuming that the government's "share of March manufacturing costs" will be the proportionate fixed manufacturing cost, what impact would accepting the government contract have on March income? (Select option "increase" or "decrease", keeping without government contract as the base. Select "none" if there is no effect.)
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Without Government Contract |
With Government Contract |
Impact |
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Regular |
Government |
Total |
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| Revenue |
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| Variable manufacturing costs |
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| Variable marketing costs |
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| Contribution margin |
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| Fixed manufacturing costs |
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| Fixed marketing costs |
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| Income |
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Davis has an opportunity to enter a highly competitive foreign market. An attraction of the foreign market is that its demand is greatest when the domestic market's demand is quite low; thus, idle production facilities could be used without affecting domestic business. An order for 2,000 units is being sought at a below-normal price to enter this market. For this order, shipping costs will total $31 per unit; total (marketing) costs to obtain the contract will be $6,000. No other variable marketing costs would be required on this order, and it would not affect domestic business. What is the minimum unit price that Davis should consider for this order of 2,000 units?
An inventory of 460 units of an obsolete model of the stove remains in the stockroom. These must be sold through regular channels (thus incurring variable marketing costs) at reduced prices or the inventory will soon be valueless. What is the minimum acceptable selling price for these units?
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| Minimum selling price |
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per unit |
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An inventory of 460 units of an obsolete model of the stove remains in the stockroom. These must be sold through regular channels (thus incurring variable marketing costs) at reduced prices or the inventory will soon be valueless. What is the minimum acceptable selling price for these units?
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| Minimum selling price |
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per unit |
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