Duty Gear manufactures and sells high-quality gear for firefighters. Operating at capacity, the company can produce and sell up to 10,000 uniforms per year. Costs associated with this level of production and sales are as follows: Per unit At Capacity (10,000 units) Direct materials $800 $8,000,000 Direct labour 500 5,000,000 Variable manufacturing overhead 700 7,000,000 Fixed manufacturing overhead 1,000 10,000,000 Total costs $3,000 $30,000,000 The firefighter gear normally sells for $5,000 per unit. Despite this high price, the company regularly expects to sell 8,000 units in the upcoming year. Fixed overhead is constant at $10,000,000 between 6,000 and 10,000 units. A filmmaker wishes to purchase 250 authentic firefighting uniforms from the company. The company’s regular price is $5,000, but the filmmaker would like volume discount and asks the company to reduce its price to $3,000 for this large purchase. Accepting this deal would not affect the company’s normal business. To fill the order, the company would have to purchase a machine to provide a special rubber coating each unit of fire gear. The machine would cost $100,000 and would have no use outside of the order. The additional rubber coating would add a cost of $50 per unit. Required: a.> Should the company introduce the new sandwich item? b>. Determine the net dollar advantage or disadvantage of accepting the order.
Duty Gear manufactures and sells high-quality gear for firefighters. Operating at capacity, the company can produce and sell up to 10,000 uniforms per year. Costs associated with this level of production and sales are as follows:
|
|
Per unit |
At Capacity (10,000 units) |
|
Direct materials |
$800 |
$8,000,000 |
|
Direct labour |
500 |
5,000,000 |
|
Variable manufacturing |
700 |
7,000,000 |
|
Fixed manufacturing overhead |
1,000 |
10,000,000 |
|
Total costs |
$3,000 |
$30,000,000 |
The firefighter gear normally sells for $5,000 per unit. Despite this high price, the company regularly expects to sell 8,000 units in the upcoming year. Fixed overhead is constant at $10,000,000 between 6,000 and 10,000 units.
A filmmaker wishes to purchase 250 authentic firefighting uniforms from the company. The company’s regular price is $5,000, but the filmmaker would like volume discount and asks the company to reduce its price to $3,000 for this large purchase. Accepting this deal would not affect the company’s normal business. To fill the order, the company would have to purchase a machine to provide a special rubber coating each unit of fire gear. The machine would cost $100,000 and would have no use outside of the order. The additional rubber coating would add a cost of $50 per unit.
Required:
a.> Should the company introduce the new sandwich item?
b>. Determine the net dollar advantage or disadvantage of accepting the order.
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