Aerotoy Company makes toy airplanes.One plane is an excellent replica of a 737,which sells for $5.Vacation Airlines wants to purchase 12,000 planes at $1.75 each to give to children who are flying unaccompanied.Costs per plane are as follows: $\begin{array}{lr}
\text { Direct materials } & \$ 1.00 \
\text { Direct labour } & 0.50 \
\text { Variable overhead } & 0.10 \
\text { Fixed overhead } & 0.90
\end{array}$ No variable marketing costs would be incurred.The company is operating significantly below the maximum productive capacity.No fixed costs are avoidable.However,Vacation Airlines wants its own logo and colours on the planes.The cost of the decals is $0.01 per plane,and a special machine costing $1,500 would be required to affix the decals.After the order is complete,the machine would be scrapped.Which of the following represents the solution?

Question

Quizplus · Accepted Answer

The relevant costs per plane are $1.00 (materials) + $0.50 (labour) + $0.10 (variable overhead) + $0.01 (decals) = $1.61. The revenue per plane is $1.75, so the contribution margin per plane is $1.75 - $1.61 = $0.14. For 12,000 planes, the total contribution margin is $0.14 * 12,000 = $1,680. Subtract the $1,500 cost of the machine, resulting in an increase in income of $180.

Aerotoy Company Makes Toy Airplanes No Variable Marketing Costs Would Be Incurred