Question

Salisbury Corporation has been producing and selling 30,000 caps a year. The company has the capacity to produce 50,000 caps with its present facilities. The following information is also available: Selling price per unit: $35 Variable costs per unit: Manufacturing $14 Selling and Administrative $6 Fixed costs in total: Manufacturing $128,000 Selling and Administrative $56,000 Gilbert Company has contacted Salisbury about purchasing 10,000 units at $24 each. A new customer who wants 20,000 units (all or nothing) right now also contacted Salisbury. Salisbury is wondering if they should sell to Gilbert Company or should take the offer by the new customer. Unfortunately, Salisbury cannot take both offers. For the new customer, variable selling and administrative costs would not be incurred. What is Salisbury's minimum price in order for them to accept the offer from the new customer (instead of Gilbert Company)

Answer 1

Minimum price = $16

Step-by-step explanation:

As per the data given in the question,

Selling price per unit = $35

Variable cost for manufacturing = $14

Variable cost for selling and administrative = $6

Fixed cost in manufacturing = $128,000

Fixed cost in selling and administrative = $56,000

For Gilbert = 10,000 × ($24 - $14 - $6)

= $40,000

For New customer = 20,000 × (P - $14) = $40,000

= 20,000P - $280,000 = $40,000

P = $16