Stuart Modems has excess production capacity and is considering the possibility of making and selling paging equipment. The following estimates are based on a production and sales volume of 2,600 pagers. Unit-level manufacturing costs are expected to be $36. Sales commissions will be established at $2.60 per unit. The current facility-level costs, including depreciation on manufacturing equipment ($76,000), rent on the manufacturing facility ($66,000), depreciation on the administrative equipment ($16,800), and other fixed administrative expenses ($79,950), will not be affected by the production of the pagers. The chief accountant has decided to allocate the facility-level costs to the existing product (modems) and to the new product (pagers) on the basis of the number of units of product made (i.e., 6,600 modems and 2,600 pagers).
a. Determine the per-unit cost of making and selling 2,600 pagers. (Do not round intermediate calculations. Round your answer to 3 decimal places.)b. Assuming the pagers could be sold at a price of $50 each, should Stuart make the pagers?

b. Assuming that Stuart could sell the pagers at a price of $50 each, it should still go with the plan to make and sell the pagers. The variable cost for producing a pager is $38.60. Each pager will make a unit contribution margin of $11.40, which will help to offset the facility-level costs since they will not be influenced by the production of the pagers.

Explanation:

a) Data and Calculations:

Production and sales volume = 2,600 pages

Unit-level manufacturing costs = $36

Total manufacturing costs = $93,600 ($36 * 2,600)

Sales commissions = $6,760 ($2.60 * 2,600)

Facility-level costs:

Depreciation on manufacturing equipment ($76,000)

Rent on the manufacturing facility ($66,000)

Depreciation on the administrative equipment ($16,800)

Other fixed administrative expenses ($79,950)

Total facility-level costs = $238,750

Overhead rate = $25.95 ($238,750/9,200)

Cost of making and selling 2,600 pagers:

Total manufacturing costs = $93,600

Overhead costs ($25.95 * 2,600) 67,470

Sales commissions = 6,760

Total cost of making and selling $167,830

Unit cost = $64.55 ($167,830/2,600)

Variable cost of making and selling a unit of pager:

Unit-level manufacturing costs = $36.00

Sales commissions = $2.60

Total variable costs = $38.60

Revenue per unit = $50.00

Contribution per unit = $11.40