Question

Avocado company has received a special order for 2,500 units of its product at a special price. the product normally sells for $420 and has the following manufacturing costs: cost per unit direct materials $ 123 direct labor 83 variable manufacturing overhead 61 fixed manufacturing overhead 108 total unit cost $ 375 assume that avocado has sufficient capacity to fill the order without harming normal production and sales. what minimum unit price should avocado charge to make a $57,500 incremental profit?

Answer 1

Avocado Company should charge a minimum of $290 per unit for the special order to make a $57,500 incremental profit, by adding the total variable costs ($267) and the incremental profit per unit ($23) together.

Step-by-step explanation:

To calculate the minimum unit price Avocado Company should charge to make an incremental profit of $57,500 on a special order of 2,500 units, we first need to consider the relevant costs and desired profit.

Fixed manufacturing overhead is typically considered a sunk cost and is not relevant in the short run for a special order decision since it will occur regardless of the order. Therefore, we will focus on the variable costs and the incremental profit desired.

In this case, the total variable cost per unit is the sum of direct materials ($123), direct labor ($83), and variable manufacturing overhead ($61), which equals $267.

To achieve the target incremental profit of $57,500, we divide this profit by the number of units in the order (2,500 units), resulting in a required incremental profit of $23 per unit.

Now, to calculate the minimum unit price, we add the total variable cost per unit ($267) and the required incremental profit per unit ($23) to get a minimum unit price of $290.

This would be the minimum price Avocado Company should charge for this special order to achieve the desired incremental profit.