Question

Deep River, a manufacturer of electronic cameras, has excess capacity. The company's New Hampshire plant has the following per-unit cost structure for item no. 656: Variable manufacturing $ 50 Fixed manufacturing 35 Variable selling 6 Fixed selling 9 Traceable fixed administrative 2 Allocated administrative 1 The traceable fixed administrative cost was incurred at the New Hampshire plant; in contrast, the allocated administrative cost represents a "fair share" of Deep River's corporate overhead. New Hampshire has been presented with a special order of 5,900 units of item no. 656 on which no selling cost will be incurred. The proper relevant cost in deciding whether to accept this special order would be:

Answer 1

$50 per unit.

Step-by-step explanation:

Relevant cost are the only cost that will be affected by the management decision to produce the special order. All fixed costs are sunk costs and are therefore irrelevant to the decision. Since to selling cost will be incurred, this implies that only the Variable manufacturing $50 is relevant.

Therefore, the proper relevant cost in deciding whether to accept this special order would be $50 per unit.

And the total relevant cost would be:

Total relevant cost to order no 656 = Number of units * Variable manufacturing = 5,900 * $50 = $295,000.