Final answer:
The question pertains to determining a cost-effective special order price for a furniture company. A price above the total variable cost of $167 per chair would contribute to fixed costs and profit, being favorable if the company is not at full capacity.
Step-by-step explanation:
The subject question is related to a special order decision for a furniture company. It appears to involve determining the optimal pricing and cost strategy when faced with a special order request that might differ from the company's normal operations.
Given the cost data provided, to decide on a special order price, we must consider the direct materials, direct labor, and the variable portion of manufacturing overhead.
Direct materials per chair are $85, and direct labor is at $50. Manufacturing overhead is 80% variable, which amounts to $32 (80% of $40). The total variable cost per chair is therefore $85 + $50 + $32 = $167. The normal selling price is $230, which reflects all costs, including the fixed and unavoidable portion of overhead, and presumably includes a profit margin.
If the special order can cover the variable cost of $167 per chair and contribute to covering fixed costs and profit, it could be considered favorable, especially if the company is not currently operating at full capacity. Considering the fixed manufacturing overhead, which is 20% of $40 (i.e., $8 per chair), this would remain unchanged with respect to the special order since it's an unavoidable fixed cost, assumed to be covered by normal operations.
A pricing decision for the special order must ensure it covers the $167 variable cost per chair at minimum, with any additional amount above this contributing to fixed costs and profit. If the company is operating below capacity, as indicated by a current activity level of 10,000 units with a capacity for 14,000 units, a special order that pays more than the variable cost could be beneficial as it utilizes unused capacity and contributes to fixed costs.