P7-6 Avid Pharmaceuticals
ACCT 509 GA1
Waverly
a.
(1) Waverly’s Operating Income Before Tax
Per Unit Total for 60,000 units
Sales $36.00 $2,160,000
Variable Costs: Direct Materials $ 6.50 Direct Labor $10.00 Variable Overhead $ 5.80 Mktg, Distrib, & Admin $ 1.70
Total Variable Costs: $24.00 $1,440,000
Contribution Margin $12.00 $ 720,000
Fixed Costs: Manufacturing Overhead $ 5.00 Mktg & Admin $ 4.50
Total Fixed Costs: $ 9.50 $ 570,000
Operating Income: $ 150,000
(2) Waverly’s Breakeven Point in Units Sale Price per Unit: $36 Variable Costs per Unit: $24 Contribution Margin per Unit: $12
Fixed Costs: $570,000 (Price * Quantity)-(Variable Cost*Quantity) –Fixed Costs=0
36x-24x-570,000=0 12x=570,000 x=47,500 units
For Waverly to breakeven, the company would have to produce 47,500 units.
b. What cost per unit is relevant for setting a minimum selling price for this order?
New Information:
Sell: $5,000 units in foreign market
VC for marketing, distribution, & administrative: $1.50 per unit
Fixed Costs: $14,000 ($2.80 per unit)
The cost that is relevant is the cost at which the sale price and the cost to make the product are equal. Where does Waverly breakeven? The minimum selling price cannot go below a certain limit or Waverly will lose money. The company would want to set the price above this amount to make a profit.
For this order, I am assuming the $570,000 of fixed costs has been met. I am assuming Waverly has hit the fixed cost breakeven amount of 47,500 units and that this is an additional order. The company is making 65,000 total units. Since this is a new order above and beyond the 47,500 units, we are just concerned about the variable costs and the new costs associated with this order. I am also assuming this order would not affect the domestic market. The costs are:
Costs for this special order:
Manufacturing &
Waverly
a.
(1) Waverly’s Operating Income Before Tax
Per Unit Total for 60,000 units
Sales $36.00 $2,160,000
Variable Costs: Direct Materials $ 6.50 Direct Labor $10.00 Variable Overhead $ 5.80 Mktg, Distrib, & Admin $ 1.70
Total Variable Costs: $24.00 $1,440,000
Contribution Margin $12.00 $ 720,000
Fixed Costs: Manufacturing Overhead $ 5.00 Mktg & Admin $ 4.50
Total Fixed Costs: $ 9.50 $ 570,000
Operating Income: $ 150,000
(2) Waverly’s Breakeven Point in Units Sale Price per Unit: $36 Variable Costs per Unit: $24 Contribution Margin per Unit: $12
Fixed Costs: $570,000 (Price * Quantity)-(Variable Cost*Quantity) –Fixed Costs=0
36x-24x-570,000=0 12x=570,000 x=47,500 units
For Waverly to breakeven, the company would have to produce 47,500 units.
b. What cost per unit is relevant for setting a minimum selling price for this order?
New Information:
Sell: $5,000 units in foreign market
VC for marketing, distribution, & administrative: $1.50 per unit
Fixed Costs: $14,000 ($2.80 per unit)
The cost that is relevant is the cost at which the sale price and the cost to make the product are equal. Where does Waverly breakeven? The minimum selling price cannot go below a certain limit or Waverly will lose money. The company would want to set the price above this amount to make a profit.
For this order, I am assuming the $570,000 of fixed costs has been met. I am assuming Waverly has hit the fixed cost breakeven amount of 47,500 units and that this is an additional order. The company is making 65,000 total units. Since this is a new order above and beyond the 47,500 units, we are just concerned about the variable costs and the new costs associated with this order. I am also assuming this order would not affect the domestic market. The costs are:
Costs for this special order:
Manufacturing &