Numble Inc., manufactures boxed stationery. Currently, the company is operating at 80 percent of capacity. A chain of hospitals has offered to buy 24,000 boxes of Numble’s’ pink-bordered thank-you notes as long as the box can be customized with the hospital chain’s logo. While the normal selling price is $5 .00 per box, the chain has offered just $3.40 per box. Numble can accommodate the Special order Without affecting current sales. Unit cost information for a box of thank-you notes follows: direct materials $1.80 Direct labour 0.33 variable overhead 0.25 fixed overhead 2.2 Total unit cost $4.58 Required: 1. What are the alternatives for Numble Company? 2. Assume that none of the fixed cost is avoidable. List the relevant cost(s) of internal production and of external purchase. 3. Which alternative is more cost-effective and by how much?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Numble Inc., manufactures boxed stationery. Currently, the company is operating at 80 percent of capacity. A chain of hospitals has offered to buy 24,000 boxes of Numble’s’ pink-bordered thank-you notes as long as the box can be customized with the hospital chain’s logo. While the normal selling price is $5 .00 per box, the chain has offered just $3.40 per box. Numble can accommodate the Special order Without affecting current sales. Unit cost information for a box of thank-you notes follows:
direct materials $1.80
Direct labour 0.33
variable
fixed overhead 2.2
Total unit cost $4.58
Required:
1. What are the alternatives for Numble Company?
2. Assume that none of the fixed cost is avoidable. List the relevant cost(s) of internal production and of external purchase.
3. Which alternative is more cost-effective and by how much?
4. Will Numble still accept the offer if the price offered is $2.50? Why or why not? Explain.
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