Question

An order has been received from an overseas customer for 3700 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 $2.90 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 1550 units for regular customers. The minimum acceptable price per unit for the special order is closest to:

Answer 1

Answer: $88.62

Step-by-step explanation:

First find the costs associated with the order.

= Direct material + Direct labor + Variable manufacturing overhead + Variable selling expense + Contribution margin lost from cutting back production for regular customers

Contriution margin lost from cutting production = Selling price - Direct material - Direct labor - Variable manufacturing overhead - Variable selling expense

= 120.10 - 51.10 - 9.80 - 5.20

= $54

= (3,700 * 51.10) + (3,700 * 9.80) + (3,700 * 2.80) + ((5.20 - 2.90) * 3,700) + ( 54 * 1,550)

= $‭327,900‬

Price per unit = ‭327,900‬ / 3,700

= $88.62