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ASMS 3510 W 2010 mid-term #1 solutions

# ASMS 3510 W 2010 mid-term #1 solutions - SOLUTIONS YORK...

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SOLUTIONS YORK UNIVERSITY Atkinson School of Administrative Studies ADMS3510 3.0 Mid Term Exam 1, Winter 2010 Sunday February 7 th – 10:00 am – 12 noon (2 hours) Instructions This is a closed book examination and no collaboration is allowed. There are 4 equally weighted questions: attempt them all. Put your name, student number and section at the top of the page. Answer each question on the examination paper, (and on the back of a page if necessary). You may write with a pencil or pen. Two hours are allowed to complete the exam. If you leave early, please respect your fellow students by leaving quietly. Place photo identification on your desk during the examination to facilitate verification. Good luck.

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Question 1: Shela Corp. sells a product for \$18 per unit. The product has the following costs: Direct material: \$ 1 Direct labour: 2 Overhead (80% fixed): 7 Total: \$10 Shela has received a special order for 1,000 units. The order would require Shela to pay an additional cost of \$1 per unit for special packaging. Required: a. If Shela sells all current production domestically and has no spare capacity, what would be the minimum sales price that the company would consider for this special order? (10 marks) If all current production is sold domestically and there is no spare capacity then any special order sale would eliminate a domestic sale: in addition they would have to incur the special packaging costs: Required price: \$18 + \$1 = \$19 Or: DM: \$ 1 DL: 2 Variable Overhead: 1.40 5.40 Normal contribution margin: (\$18-\$5.40): \$12.60 Special packaging: 1.00 Total: \$19.00 b. Assume that Shela has sufficient idle capacity to produce the 1,000 units. If Shela wants to increase its operating profit by \$6,600, what would it charge as a per-unit selling price? (10 marks) Variable cost: Direct material: \$ 1.00 Direct labour: 2.00 Overhead (80% fixed): 20% * \$7: 1.40 Special packaging: 1.00 \$ 5.40 Required profit: \$6,600/1,000: \$ 6.60 Target selling price: \$12.00
c: What are the qualitative arguments against offering a “special” price for this order? (5 marks) i) one-time special orders are only valid where the situation is a “one-off” and the market is separated from the regular market.

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ASMS 3510 W 2010 mid-term #1 solutions - SOLUTIONS YORK...

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