Question

Landor Appliance Corporation makes and sells electric fans. Each fan regularly sells for $43. The following cost data per fan is based on a full capacity of 144,000 fans produced each period. Direct materials $ 7 Direct labor $ 9 Manufacturing overhead (70% variable and 30% unavoidable fixed) $ 10 A special order has been received by Landor for a sale of 15,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be $5 per fan for shipping. Landor is now selling 129,000 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?

Answer 1

$18.30

Step-by-step explanation:

The minimum selling price should at least cover the variable cost per unit for the special order

Thus, we need to calculate the Variable Unit Cost for the special order as follows :

Direct materials $7.00

Variable Manufacturing Overhead ( $ 9 × 70%) $6.30

Shipping Cost $5.00

Total $18.30

Note

1.Labor Costs are avoidable

2.30% of Manufacturing overheads are unavoidable thus irrelevant for this decision

Conclusion :

The minimum selling price per fan in negotiating a price for this special is the price that covers all variable costs for this order ie $18.30