Reference no: EM132479689

The Phone Company has the following costs of producing and selling a cell phone assuming it produces and sells the normal volume of 100,000 of these cell phones per month:

Per unit manufacturing cost

Direct materials                              $50.00

Direct labor                                      10.00

Variable manufacturing overhead cost    40.00

Fixed manufacturing overhead cost        30.00

Per unit selling cost

Variable                                             15.00

Fixed                                                10.00

1. Note that 100,000 (normal volume of production and sales) is the denominator used to calculate and allocate fixed costs per unit (regardless of the number of units actually produced). Any under- or over-allocated overhead will be adjusted at the end of the year to COGS. The selling price of a cell phone is $250, unless otherwise stated in the questions below. Variable selling costs are incurred only if (and when) the phones are sold.
2. Each situation below is independent of the other situations. That is, when you answer one question, assume that the situations described in other questions have not occurred. When you are considering opportunities for increased sales, assume that Phone Company has enough manufacturing and sales capacity to make these sales without incurring additional fixed costs. Ignore tax issues: just think in terms of operating income.

QUESTIONS:

Question 1. What is the unit cost (inventory value) of a cell phone on the Phone Company's balance sheet for external reporting?

Question 2. The Phone Company currently produces and sells 100,000 cell phones each month. The company's marketing research department estimates that the sales volume of cell phones would increase by 20% if the price per phone is reduced to $200. If the price is reduced to $200, then will this increase or decrease the company's operating income, and by how much?

Question 3. The Phone Company is considering entering into a contract to provide Service Provider Company with 10,000 cell phones per month, in addition to its existing business. The contract would require Service Provider to reimburse Phone Company for its full manufacturing costs per unit plus an additional fee of $100 per phone. Assume that the above-mentioned allocation rates for overhead costs will not change during the year as a result of taking this contract. That is, the allocation rates will remain the same regardless of any under- or over-allocated overhead caused by accepting the order. The customer will not be charged or credited with any under- or over-allocation that happened during the year. Any over- or underallocated overhead will be charged or credited to Phone Company's COGS at the end of the year. The Phone Company would incur no variable selling costs related to this contract. How much would Phone Company's monthly operating income increase or decrease as a result of taking this contract?