5-45 Pricing and Confusing Variable and Fixed Costs (hal.

209-210)
Goldwyn Electronics had a fixed factory overhead budget for 19X2 of $10 million. The
company planned to make and sell 2 million units of the product, a communications device.
All variable manufacturing costs per unit were $10. The budgets income statement contained
the following:

Sales $ 40,000,000
Manufacturing cost of goods sold $ 30,000,000
Gross margin $ 10,000,000
Deduct selling and administrative expenses $ 4,000,000
Operating income $ 6,000,000

For simplicity, assume that the actual variable costs per unit and the total fixed costs
were exacly as budgeted.
Required
1. Compute Goldwyn’s budgeted fixed factory overhead per unit.
2. Near the end of 19X2 a large computer manufacturer offered to buy 100,000 units for
$1.2 million on a one-time special order. The president of Goldwyn stated: “The offer
is a bad deal. It’s foolish to sell below full manufacturing costs per unit. I realize that
this order will have only a modest effect on selling and administrative costs. They will
increase by a $10,000 fee paid to our sales agent.” Compute the effect on operating
income if the offer is accepted.
3. What factors should the president of Goldwyn consider before finally deciding
whether to accept the offer?
4. Suppose the original budeget for fixed manufacturing costs was of $10 million, but
budgeted units of product were 1 million. How would your answers to requirements 1
and 2 change? Be specific.