The average 40 per hour. variable overheard varies with the quantity of direct labor hours. The plants has a capacity of 20000 direct labor-hours, but current production uses only 10,000 direct labor-hours. Required:
a. A nationwide car-sharing service has offered to buy 2,500 Star100 systems and 2,500 Star150 systems if the price is lowered to $400 and $500, respectively, per unit.
a-1. If Unter accepts the offer, how many direct labor-hours will be required to produce the additional systems?
a-2. Complete the following table to determine the differential profit increase (or decrease) if Unter accepts this proposal. Prices on regular sales will remain the same.
Differential revenues:
Star 100
Star 150
Differential costs:
Star 100
Star 150
Differential profit (loss)
b-1. Supposed that the car-sharing service has offered instead to buy 3,500 each of the two models at $400 and $500, respectively. This customer will purchase the 3,500 units of each model only in an all-or-nothing deal. That is, Unter must provide all 3,500 units of each model or none. Unter’s management has decided to fill the entire special order for both models. In view of its capacity constraints, Unter will reduce sales to regular customers as needed to fill the special order. Complete the table below to determine the total contribution margin with the special order added.
Star100 Star150 Total
Special Order:
Contribution margin per unit
Number of units
Total contribution margin
Regular production:
Contribution margin per unit
Number of units
Total contribution margin
Total contribution margin for both
b-2. How much will the profits change if the order is accepted?
c-1. Assume that, in the situation presented in requirement b-1, the plant can work overtime. Direct labor costs for the overtime production inrease to $60 per hour. Variable overhead costs for overtime production are $10 per hour more than for normal production. Complete the table below to determine the total contribution margin.
Star100 Star150 Total
Special Order:
Contribution margin per unit
Number of units
Total contribution margin
Regular production:
Contribution margin per unit
Number of units
Total contribution margin
Total contribution margin for both:
Additional direct-labor costs
Additional variable overhead
Total contribution margin for both (with additional costs):
c-2. How much will the profits change in this situation?