Drugs-R-Us, Inc., produces equipment for manufacturing drugs. The costs of manufacturing and marketing this equipment at the company's normal volume of 3,000 units per month are shown in Exhibit 1. EXHIBIT 1 - Costs per Unit for Equipment
Unit manufacturing costs: Variable materials $200 Variable labor 300 Variable overhead 150 Fixed overhead 240 Total unit manufacturing costs $ 890
Unit marketing costs: Variable $100 Fixed 280 Total unit marketing costs $ 380
Total unit costs $1,270
The following questions refer only to the data given above. Unless otherwise stated, …show more content…
Drugs-R-Us has an opportunity to enter a foreign market in which price competition is keen. An attraction of the foreign market is that demand there is greatest when demand in the domestic market is quite low; thus, idle production facilities could be used without affecting domestic business. Unlike many foreign markets there are no government restrictions. An order for 1,000 units is being sought at a below-normal price in order to enter this market. Additional shipping and handling costs for this order will amount to $150 per unit, while the cost of obtaining the contract (marketing costs) will be $8,000 in addition to the normal variable marketing costs. Domestic business would be unaffected by this order. What is the minimum (e.g. breakeven) unit price Drugs-R-Us should consider for this order of 1,000 units?
CVP Income Statement
| Per Unit | Total | Sales (1,000 units) | | $ 1,500 | $ 1,500,000 | Variable costs | | | | Direct materials | $ 200 | | | Direct labor | 300 | | | Manufacturing overhead | 150 | | | Marketing expenses | 180 | | | Shipping and handling cost | 150 | | | Total variable costs | | 980 | 980,000 |