Question

Lullaby Appliance Corporation makes and sells electric fans. Each fan regularly sells for $42. The following cost data per fan is based on a full capacity of 150,000 fans produced each period. Direct materials $ 8 Direct labor $ 9 Manufacturing overhead (70% variable and 30% unavoidable fixed) $ 10 A special order has been received by Landor for a sale of 25,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be $4 per fan for shipping. Landor is now selling 120,000 fans through regular channels each period. Assume that direct labor is an avoidable cost in this decision. What should Landor use as a minimum selling price per fan in negotiating a price for this special order? a. $24 per fan b. $27 per fan c. $28 per fan d. $31 per fan

Answer 1

Answer:C

Step-by-step explanation:

A. $28

Excess Capacity: 150,000 - 120,000 = 30,000

$8 + $9 + ($10 x 0.70) + 4 = $28

Answer 2

c. $28 per fan

Step-by-step explanation:

Data provided

Direct material = $8

Direct labor = $9

Manufacturing overhead = $10

Variable percentage = 70%

Shipping per fan = $4

The calculation of minimum selling price per fan is shown below:-

Variable costs of making the additional fans = Direct material + Direct labor + Manufacturing overhead × Variable percentage + Shipping per fan)

= $8 +$9 + $10 × 0.7 + $4

= $8 +$9 + $7 + $4

= $28

Therefore, the minimum selling price of the order is $28

(It should really be higher than this as there are other downsides of taking special orders at lower costs. In particular, one is that the loyal customers will find out about a lower price and claim it.)