Marquette Manufacturing produces “invisible” electric dogfences, sold through retail locations nationwide. The selling priceof the fence is $150 per unit. The cost to manufacture and marketthe fences is shown below. These figures represent the cost at thecompany’s normal volume of 3,000 units per month.
Unit Manufacturing CostsVariable materials$ 15.00Variable labor$ 17.50Variable overhead$ 12.50Fixed overhead$ 16.00Total unit manufacturing costs$ 61.00Unit Marketing CostsVariable$ 12.00Fixed overhead$ 17.00Total unit marketing costs$ 29.00Total unit costs$ 90.00
(NOTE: Unless otherwise stated, assume that no connection existsbetween the situation described in each question; each isindependent. Also, ignore taxes or other costs not specificallymentioned in the questions.)
- The company’s marketing team estimates that sales volume couldbe increased to 5,000 units per month if the sales price waslowered from $150 to $125 per unit. The production manager hasconfirmed that they have the capacity to increase production tothis level. Assume that the cost pattern will not vary at theincreased level of production. If management decreases the price,what would the impact on monthly sales, income and costs be? Foreach figure, indicate whether the change will result in anincrease, decrease or no change in the sales, income and cost.Would you recommend the reduction in sales price? Why or Why not?(Show all supporting calculations).
- At the end of the year the production manager is takinginventory and finds 600 units of an older model of invisiblefencing that the company no longer manufactures. These obsoleteunits can be disposed of through their regular channels, therebyincurring variable marketing expenses. What is the lowest pricethat they should accept for these obsolete units, realizing that ifthey do not sell them these units will have to be thrown away.(Show all supporting calculations).
- Marquette receives a proposal from an outside contractor whooffers to make and ship 1,500 fences directly to Marquette’scustomers as orders arrive from Marquette’s sales force. Whenmanagers meet to discuss this proposal, Product Manager Will Hansenbrings up the fact that they have the design for an electric fencethat can be used for large animals that has never been produced.Will suggests that this may be the perfect time to launch this newproduct and at a selling price of $225 per unit it is sure toincrease sales revenue. The production manager calculates that theidle time created by accepting the contractors offer would allowthem to produce 1,000 of the new fence. The cost to produce the newfence would be $175 in variable manufacturing expense but fixedmanufacturing and marketing costs would remain unchanged. Theproduct mix would now be 1,000 of the new fence and 1,500 of theold fence. If Marquette wants to seriously consider taking thecontractors offer, what in-house cost should be used to evaluatethe outside contractor’s bid. If the payment to the outsidecontractor is $90 per unit, should they accept the offer? Why orwhy not? (Show all supporting calculations).
- On March 1, Marquette is approached by the developer of a largesubdivision who wants to install an invisible fence in the yard of1,200 homes he is constructing. The developer will contract withMarquette for the 1,200 fences on the condition that they aredelivered within 30 days (March 31). This is not good timing forMarquette since they have recently signed a contract with HomeWarehouse, a national home improvement chain and have been workingat 100% capacity for several months. If Marquette accepts thebuilder’s order, it will lose 1,200 units that would normally besold to one of its existing customers. When they tell the developerthat they do not believe they can fill his order, he offers toreimburse the company for his “share” of the fixed manufacturingcosts and will pay a $5,000 “bonus” on delivery. Since the sale tothe developer will not incur any variable marketing costs,Marquette reconsiders accepting the developer’s order. What impactwill accepting this order have on Marquette’s income in March?Should Marquette accept the order from the developer? Why or Whynot? (Show all supporting calculations).
- Marquette has an opportunity to sell its product through anonline retailer. To begin selling through this online platform,they are required to ship 2,000 units to the retailers’ orderfulfillment warehouse. The other condition of this offer is thatthey pay a one-time vendor marketing fee of $5,000. To get theunits to the fulfillment warehouse by the deadline Marquette willneed to pay for expedited shipping at a cost of $10 per unit. Whatis the minimum price Marquette should charge the retailer for thisinitial order of 2,000 units? (Show all supportingcalculations).