Reference no: EM133156649

Question - Through creating unique designs and making use of uncommon materials, Barter Ltd. has been gaining a lot of good reputation as a successful handbag manufacturer. The marketing team of the company found out that one of the main factors generally attributed to slowing growth in this type of industry is the unstable shift in consumer preference from larger bags to smaller stylish ones. As a result, Barter Ltd. is working at full production capacity producing 40,000 units for its unique product line of stylish small handbags.

Here are the manufacturing costs per unit for this line of product:

Direct materials $11.00

Direct labor $10.00

Manufacturing overhead $12.00

Total manufacturing cost $33.00

The nonmanufacturing costs, all variable, are $8 per unit, and the sales price is $68 per unit. The per-unit manufacturing overhead cost is based on a $6 variable cost per unit and $240,000 fixed costs.

Mike Conner Limited (MCL), a retailer specified in selling fashion accessories and small handbags, has asked Barter to produce 6,600 handbags with a design modification for a new style of the handbag. This modification would still have the same manufacturing processes. However, because of the nature of the proposed sale, the estimated nonmanufacturing costs per handbag are only $4 (not $8). Barter would sell the newly modified handbag to MCL for $53 per unit.

Required -

1-a. For both the current and special order, calculate the contribution margin for 6,600 units.

1-b. Should Barter accept the special order for MCL and produce those handbags, based on the answer of 1-a?

2. Suppose that Barter Ltd. had been working at less than full capacity to produce 34,000 units of the product when MCL made the offer. What is the minimum price per unit that Barter should accept for the modified handbag under these conditions?