The Phone Company has the following costs of producing and selling a cell phone when it...

90.2K

Verified Solution

Question

Finance

The Phone Company has the following costs of producing andselling a cell phone when it produces and sells 100,000 cell phonesper month:
Per unit manufacturing cost
           Directmaterials                                            $60.00
           Directlabor                                                  10.00
           Variable manufacturing overhead cost           35.00
           Fixed manufacturing overhead cost               20.00
Per unit selling cost
           Variable                                                         20.00
           Fixed                                                              10.00
Note that ‘100,000’ is the denominator used to calculatefixed costs per unit. Total fixed costs do not change regardless ofproduction/sales level.. The selling price of a cell phoneis $250, unless otherwise stated in the questions below.
Each situation below is independent of the other situations.That is, when you answer one question, assume that the situationsdescribed in other questions have not occurred. When youare considering opportunities for increased sales, assume thatPhone Company has enough manufacturing capacity to make these saleswithout incurring additional fixed costs (i.e., it has excesscapacity).
The Phone Company is considering entering into a contract toprovide SP Company with 8,000 cell phones per month, in addition toits existing business. The contract would require SP Company to payPhone Company for total manufacturing costs for the 8,000 cellphones plus a profit of $750,000 per month. The Phone Company wouldincur no variable selling costs related to this contract. How muchwould Phone Company’s monthly operating income increase or decreaseas a result of taking this contract? Assume that if Phone Companytakes this contract, it does not change the fixed overheadallocation rate (that is, $20/unit) that it set at the beginning ofthe year.
The Phone Company has the opportunity to provide anorganization with a one-time special order of 20,000 cell phones,in addition to its existing business. The only variable sellingcost associated with this order would be shipping costs of $10.00per cell phone, and fixed selling costs for this order (in additionto Phone Company’s existing fixed costs) would be $200,000. Whatselling price per unit would be required to generate $600,000 inincremental operating income from this order?
The Phone Company has received an offer by a contract supplierto make and ship the Phone Company’s cell phone (100,000 units)directly to the Phone Company’s customers. The Phone Company willcontinue to do some product design and marketing but will no longermanufacture the phones itself. If the Phone Company accepts thisoffer, its variable manufacturing costs would be $0 and its fixedmanufacturing cost would be reduced by 75% of its current level. Inaddition, its variable selling cost would decrease by one-third andits fixed selling cost would not change. How much per cell phonecould the Phone Company pay the contract supplier if it wants tomaintain its present level of operating income?

Answer & Explanation Solved by verified expert

3.5 Ratings (631 Votes)

1 contract to provide 8000 units per month SP company will provide for total manufacturing related costs both fixed and variable component and 750000 per month We see the costs involved other than manufacturing costs Direct cost 70 per unit 60 direct material 10 direct labour cost Selling costs 10 per unit The question states See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

The Phone Company has the following costs of producing andselling a cell phone when it produces and sells 100,000 cell phonesper month:Per unit manufacturing cost Directmaterials $60.00 Directlabor 10.00 Variable manufacturing overhead cost 35.00 Fixed manufacturing overhead cost 20.00Per unit selling cost Variable 20.00 Fixed 10.00Note that ‘100,000’ is the denominator used to calculatefixed costs per unit. Total fixed costs do not change regardless ofproduction/sales level.. The selling price of a cell phoneis $250, unless otherwise stated in the questions below.Each situation below is independent of the other situations.That is, when you answer one question, assume that the situationsdescribed in other questions have not occurred. When youare considering opportunities for increased sales, assume thatPhone Company has enough manufacturing capacity to make these saleswithout incurring additional fixed costs (i.e., it has excesscapacity).The Phone Company is considering entering into a contract toprovide SP Company with 8,000 cell phones per month, in addition toits existing business. The contract would require SP Company to payPhone Company for total manufacturing costs for the 8,000 cellphones plus a profit of $750,000 per month. The Phone Company wouldincur no variable selling costs related to this contract. How muchwould Phone Company’s monthly operating income increase or decreaseas a result of taking this contract? Assume that if Phone Companytakes this contract, it does not change the fixed overheadallocation rate (that is, $20/unit) that it set at the beginning ofthe year.The Phone Company has the opportunity to provide anorganization with a one-time special order of 20,000 cell phones,in addition to its existing business. The only variable sellingcost associated with this order would be shipping costs of $10.00per cell phone, and fixed selling costs for this order (in additionto Phone Company’s existing fixed costs) would be $200,000. Whatselling price per unit would be required to generate $600,000 inincremental operating income from this order?The Phone Company has received an offer by a contract supplierto make and ship the Phone Company’s cell phone (100,000 units)directly to the Phone Company’s customers. The Phone Company willcontinue to do some product design and marketing but will no longermanufacture the phones itself. If the Phone Company accepts thisoffer, its variable manufacturing costs would be $0 and its fixedmanufacturing cost would be reduced by 75% of its current level. Inaddition, its variable selling cost would decrease by one-third andits fixed selling cost would not change. How much per cell phonecould the Phone Company pay the contract supplier if it wants tomaintain its present level of operating income?