Question

Mckerchie Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as G62. Data concerning this product are given below:

Per unit
Selling price...........$ 160
Direct materials.......$ 13
Direct labor............$ 7
Variable manufacturing overhead......$ 6
Fixed manufacturing overhead.........$29
Variable selling expense................ $ 2
Fixed selling and administrative expense.......$ 10
he above per unit data are based on annual production of 9,000 units of the component. Direct labor can be considered to be a variable cost.
The company has received a special, one-time-only order for 300 units of component G62. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order.
Required:
1. Assuming that Mckerchie has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go?

Answer 1

The minimum price which the company should not go below is $26.00

Step-by-step explanation:

The minimum price which the company should not go below is the price which covers all cost of manufacturing and non-manufacturing to meeting the special, one-time-only order.

Thus we need to calculate the per unit cost of the special order.

Unit cost of the special order

Direct materials $ 13.00

Direct labor $ 7.00

Variable manufacturing overhead $ 6.00

Total Cost $26.00

Note

All fixed cost are irrelevant in this calculation as the cost would be incurred whether or not the special order is accepted.

Also the question specifically mentioned that "There would be no variable selling expense on this special order" We need not to include any variable selling expense