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Unformatted text preview: M4-17 The current production volume is 100,000 units ($4,400,000/$44). The variable production costs are ($3,200,000 − $800,000)/100,000 = $24. Hence, at a unit selling price of $30, the order provides a contribution of $6 per unit and a total contribution of $75,000 ($6 × 12,500). Even if it is profitable, the large sale to the hospital supply company may take away some of the attention of management from regular customers, and it may upset regular customers who learn of the lower price, resulting in pressure to lower overall prices. E4-21 a. The variable costs of manufacturing and selling can be determined using the high-low method: Variable costs per unit = ($3,060,000 − $2,745,000) = $5.25 (240,000 −180,000) Now we can determine the unit contribution margin and the total contribution from accepting the order. Unit selling price Unit variable costs Unit contribution margin Size of order Financial impact of accepting $ 9.00 (5.25) $ 3.75 × 60,000 $225,000 Accepting the order will increase profits by $225,000, rather than reducing profits by $225,000, as the general manager indicated. The general manager incorrectly compared the selling price to the average unit cost of 240,000 units, rather than the incremental unit cost. b. If SafeRide, Inc. were operating at capacity, there would be an opportunity cost associated with accepting the order. This opportunity cost would be equal to the net benefits of the regular business that SafeRide would have to turn away. Assuming a normal selling price of $20, the net disadvantage of accepting the order is $660,000: ...
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- Spring '11
- Contribution Margin, general manager