Sandusky Inc. has the following costs when producing 100,000 units:
Variable Costs $400,000
Fixed Costs 600,000
An outside supplier is interested in producing the item for Sandusky. If the item is producing outside, Sandusky could use the released production facilities to make another item that would generate $100,000 of net income. At what unit price would Sandusky accept the outside supplier's offer if Sandusky wanted to increase net income by $80,000?
To determine the unit price at which Sandusky would accept the outside supplier's offer, we need to calculate the additional contribution margin required to generate a net income increase of $80,000. The contribution margin is the difference between the unit price and the variable cost per unit.
First, let's calculate the contribution margin per unit for Sandusky's current production:
Contribution Margin = Unit Price - Variable Cost per Unit
Given that Sandusky's variable costs are $400,000 for 100,000 units, we can calculate the variable cost per unit:
Variable Cost per Unit = Variable Costs / Number of Units
Variable Cost per Unit = $400,000 / 100,000 units = $4 per unit
With the variable cost per unit, we can calculate the contribution margin:
Contribution Margin = Unit Price - $4 per unit
Now, let's calculate the current contribution margin for Sandusky's production:
Contribution Margin = $ Unit Price - $4 per unit
Next, to determine the unit price at which Sandusky would accept the outside supplier's offer, we need to find the additional contribution margin required to increase the net income by $80,000. The additional contribution margin can be calculated as follows:
Additional Contribution Margin = Additional Net Income / Additional Units
Given that the additional net income is $80,000 and that Sandusky can produce another item that would generate $100,000 net income if it uses the released production facilities, we can calculate the additional units as follows:
Additional Units = Additional Net Income / Additional Net Income per Unit
Additional Units = $80,000 / $100,000 per unit = 0.8 units
Therefore, the additional contribution margin required can be calculated as:
Additional Contribution Margin = ($100,000 per unit) - ($4 per unit) = $96 per unit
In conclusion, Sandusky would accept the outside supplier's offer if the unit price offered by the supplier is greater than $96 per unit.