Question

Golden Generator Supply is approached by Mr. Stephen, a new customer, to fulfill a large one-time-only special order for a product similar to one offered to regular customers. Golden Generator Supply has excess capacity. The following per unit data apply for sales to regular customers:

Direct materials $180
Direct manufacturing labor 170
Variable manufacturing support 250
Fixed manufacturing support 140
Total manufacturing costs 740
Markup (10% of total manufacturing costs) 74
Estimated selling price $814

Required:
If Mr. Stephen wanted a long-term commitment, and not a one-time-only special order, for supplying this product, calculate the most likely price to be quoted assuming the markup remains the same?

Answer 1

$814

Step-by-step explanation:

With regards to the above, if it charges a price below the full cost and markup, it will not be able to sustain such in the long run.

However, when a company received one time only, then they may be willing to charge a lower price in order to cover a portion of their fixed cost when there is extra capacity; whereas in the long run, they will have to charge at full cost so that they will not lose money.