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HEB Supply manufactures airsoft guns used by recreational gamers. The cost of producing a box of 2,500 air soft ammunition is as follows:

Direct materials $ 12.50

Direct labor 6.25

Variable factory overhead 18.75

Fixed factory overhead 25.00

Variable selling, general, and administrative costs 18.75

Fixed selling, general, and administrative costs 4.00

The fixed factory overhead and fixed SG&A cost is allocated based on an assumption that the business will produce 400,000 boxes of paintballs per year. The company has capacity to produce 500,000 boxes without impacting either category of fixed cost.

(a) The market for this ammunition has become very competitive. Management has requested to know the break-even price that can be charged for a box of ammunition, assuming production and sale of 400,000 boxes.

(b) Management has received a special order request for 100,000 boxes of “private label” airsoft ammunition. The order specifies a per box price of $75. How will profitability be impacted if the order is accepted?

Problem 2

AMF produces a catalog that is placed in airline seatbacks during international flights. Passengers typically skim the catalog during flights and can buy selected merchandise from flight attendants, duty and tax free, while over international waters. Below is a report for a recent period:

Total Beverages Jewelry Electronics

Sales $ 26,00,000 $ 14,00,000 $ 5,00,000 $ 7,00,000

Variable expenses 16,35,000 9,80,000 2,00,000 4,55,000

Contribution margin $ 9,65,000 $ 4,20,000 $ 3,00,000 $ 2,45,000

Fixed expenses 9,00,000 3,00,000 3,00,000 3,00,000

Income (loss) $ 65,000 $ 1,20,000 $ – $ (55,000)

The fixed expense is the amount paid for printing the catalog and paying the airline to include the item in seatbacks. Management is evaluating discontinuing the sale of electronics products. Fixed costs will not change; however, jewelry sales are expected to increase by 30%.

Determine if overall income will be improved if the sale of electronics products is ceased.

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Title: umuc-acct321-homework-7

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