Multiple choice comprehensive problem on relevant costs

Multiple choice comprehensive problem on relevant costs. The following are the Class Company’s unit costs of manufacturing and marketing a high-style pen at an output level of 20,000 units per month:

Manufacturing cost $1.00 Direct materials Direct manufacturing labor 1.20 Variable manufacturing overhead cost 0.80 0.50

The following situations refer only to the preceding data; there is no connection between the situations. Unless stated otherwise, assume a regular selling price of $6 per unit. Choose the best answer to each question. Show your calculations.

1. For an inventory of 10,000 units of the high-style pen presented in the balance sheet, the appropriate unit cost to use is (a) $3.00, (b) $3.50, (c) $5.00, (d) $2.20, 01(e) $5.90.

2. The pen is usually produced and sold at the rate of 240,000 units per year (an average of 20,000 p month). The selling price is $6 per unit, which yields total annual revenues of $1,440,000. Total costs are $1,416,000, and operating income is $24,000, or $0.10 per unit. Market research estimates that unit sales could be increased by 10% if prices were cut to $5.80. Assuming the implied cost-behavior patterns continue, this action, if taken, would

a. Decrease operating income by $7,200

b. Decrease operating income by $0.20 per unit ($48,000) but increase operating income by 10% of revenues ($144,000), for a net increase of $96,000

c. Decrease fixed cost per unit by 10%, or $0.14, per unit, and thus decrease operating income by $0.06 ($0.20 — $0.14) per unit

d. Increase unit sales to 264,000 units, which at the $5.80 price would give total revenues of $1,531,200 and lead to costs of $5.90 per unit for 264,000 units, which would equal $1,557,600, and result in an operating loss of $26,400

e. None of these

3. A contract with the government for 5,000 units of the pens calls for the reimbursement of all manufacturing costs plus a fixed fee of $1,000. No variable marketing costs are incurred on the government contract. You are asked to compare the following two alternatives: