Question

Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 46,000 units per month is as follows:

Per Unit Direct materials $45.60
Direct labor $8.70
Variable manufacturing overhead $1.70
Fixed manufacturing overhead $18.50
Variable selling & administrative expense $3.00
Fixed selling & administrative expense $14.00

The normal selling price of the product is $98.10 per unit.

An order has been received from an overseas customer for 2,600 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.80 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,000 units for regular customers. The minimum acceptable price per unit for the special order is closest to: __________

Answer 1

Ash Corporation

The minimum acceptable price per unit for the special order is closest to:

= $94.93.

Step-by-step explanation:

a) Data and Calculations:

Normal production capacity per month = 46,000 units

Per Unit

Direct materials $45.60

Direct labor $8.70

Variable manufacturing overhead $1.70

Fixed manufacturing overhead $18.50

Variable selling & administrative expense $3.00

Fixed selling & administrative expense $14.00

The normal selling price of the product = $98.10 per unit.

Special order = 2,600 units

Relevant costs:

Direct materials $45.60

Direct labor $8.70

Variable manufacturing overhead $1.70

Variable selling & administrative expense $1.20

Total relevant costs per unit $57.20

Total variable cost for the special order = $148,720 ($57.20 * 2,600)

Loss sales revenue (1,000 * $98.10) 98,100

Total cost for the special order = $246,820

Minimum acceptable price per unit = $94.93 ($246,820/2,600)