Question

Assume that MTA Sandwiches sells sandwiches for $7.20 each. The cost of each sandwich follows. Materials $ 2.70 Labor 0.90 Variable overhead 0.45 Fixed overhead ($10,800 per month, 6,000 units per month) 1.80 Total costs per sandwich $ 5.85 One of MTA’s regular customers asked the company to fill a special order of sandwiches at a selling price of $5.40 each for a fund-raising event sponsored by a social club at the local college. MTA has capacity to fill it without affecting total fixed costs for the month. MTA’s general manager was concerned about selling the sandwiches below the cost of $5.85 and has asked for your advice. Required: a. Prepare a schedule to show the impact on MTA’s profits of providing 400 sandwiches in addition to the regular production and sales of 6,000 sandwiches per month. b. Based solely on the data given, what is the lowest price per sandwich at which the special order can be filled without reducing MTA’s profits?

Answer 1

Answer:

MTA Sandwiches

a. A Schedule:

                                  Special Order  Regular Production    Total

Total contribution       $540                   $18,900                $19,440

Fixed overhead              0                        10,800                  10,800

Profit                           $540                     $8,100                  $8,640

Profits increased by $540 with the special order.

b. The lowest price per sandwich at which this special order  of 400 sandwiches can be filled without reducing MTA's profits is $4.05.  This is equal to the unit variable cost.  At this price, neither profit will be generated nor loss incurred from the special order.

Explanation:

a) Data and Calculations:

Cost of each sandwich:

Materials                             $ 2.70

Labor                                     0.90

Variable overhead                0.45

Fixed overhead

($10,800 per month,

6,000 units per month)       1.80

Total costs per sandwich $ 5.85

b) Computation of total profit for special order and regular production:

                                      Special Order     Regular Production   Total

Selling price =                           $5.40         7.20

Variable (Relevant) cost:

Materials                   $ 2.70

Labor                           0.90

Variable overhead      0.45      $4.05        $4.05

Contribution per unit                $1.35         $3.15

Total contribution ($1.35*400) $540     $18,900  ($3.15*6,000)   $19,440

Fixed overhead                                                                                  10,800

Profit                                                                                                  $8,640