Precision tools makes high quality pocket knives. These knives are sold for $40 each to hardware stores like Ace Hardware. Precision Tools reported the following information about the production and s

Precision tools makes high quality pocket knives. These knives are sold for $40 each to hardware stores like Ace Hardware. Precision Tools reported the following information about the production and sale of pocket knives.

Annual capacity—70,000

Annual production and sales—50,000

Per unit Total

Variable manufacturing costs—-$8 per unit—–$400,000

Fixed manufacturing overhead costs—10 per unit—-500,000

Variable SG+A costs—3 per unit—-150,000

Fixed Selling and administration costs—2 per unit—100,000

—————————————————————————————-

Total costs—————$23 per unit——$1,150,000

Extreme Camping, Inc.,has approached Precision Tool with a one-time special order. Precision made the following notes about the special order.

Extreme will purchase 15,000 knives at a price of $20 per unit.

These knives are identical to precision’s regular units, except that a logo will be affixed to the knife

To install the logos, Precision will need to purchase a special stamping machine for $11,000 and pay $1.5 for each logo

Because Extreme will pick up the special order, it will not need to be shipped. This will reduce variable shipping cost by $ 1.25 per units.

1. Rather than paying $20 per unit, Extreme will pay a $4 markup over the current total manufacturing cost for regular units. Compute the change in profit that would result if Precision accepts the special order with this new price.

2. Assume that Before accepting the special order, Precision’s management learns that capacity has been reduced to 55,000 units due to an equipment failure. Compute the lowest price that Precision should be willing to accept for the special order.

3. Return to the original data above. Assume that annual production and sales is 65000 units. Compute the lowest price that Precision should be willing to accept for the special order.

Leave a Comment