Polynesia Company manufactures sonars for fishing boats.Its Model 70 sells for $300.Polynesia produces and sells 5,500 of them per year.Cost data are as follows:
Arthur Bailey,the sales manager,wants to pitch a special sale to a new Canadian fishing company that is outfitting new boats.He proposes a sale of 40 units at a special price of $150 per unit.He believes that it will not cannibalize the company's regular sales as it is a one-time transaction.It will require the normal amount of variable costs,both marketing and manufacturing,but will not impact the fixed costs in any way.The president of the company has some reservations,but finally agrees to make the deal if and only if it adds a minimum of $1,500 to operating income.Based on the president's criteria,Polynesia will decline the offer.

Question

Polynesia Company manufactures sonars for fishing boats.Its Model 70 sells for $300.Polynesia produces and sells 5,500 of them per year.Cost data are as follows:
  Arthur Bailey,the sales manager,wants to pitch a special sale to a new Canadian fishing company that is outfitting new boats.He proposes a sale of 40 units at a special price of $150 per unit.He believes that it will not cannibalize the company's regular sales as it is a one-time transaction.It will require the normal amount of variable costs,both marketing and manufacturing,but will not impact the fixed costs in any way.The president of the company has some reservations,but finally agrees to make the deal if and only if it adds a minimum of $1,500 to operating income.Based on the president's criteria,Polynesia will decline the offer.

Quizplus · Accepted Answer

The contribution margin per unit for Model 70 can be calculated as follows:
Sales price per unit - Variable cost per unit = Contribution margin per unit
$300 - (variable costs per unit) = Contribution margin per unit

Since no information is given about the variable costs per unit, we cannot calculate the contribution margin per unit. However, we can say that the contribution margin per unit for the special sale of 40 units at $150 per unit would be:
$150 - (variable costs per unit) = Contribution margin per unit

Since the special sale would require the normal amount of variable costs, the contribution margin per unit for the special sale would be lower than that for regular sales. Therefore, the total contribution margin for the special sale of 40 units would be lower than that for selling 40 units at the regular price of $300 per unit.

Given that the special sale of 40 units would not generate enough contribution margin to meet the president's requirement of adding a minimum of $1,500 to operating income, Polynesia would decline the offer.

Polynesia Company Manufactures Sonars for Fishing Boats