Question

Stella 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 Stella Corp. 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. Stella Corp. is now selling 120,000 fans through regular channels each period. What should Stella Corp. use as a minimum selling price per fan in negotiating a price for this special order?
a. $27 per fan
b. $24 per fan
c. $28 per fan
d. $31 per fan

Answer 1

c. $28 per fan

Step-by-step explanation:

Consider the Costs to provide for the Special Order. Exclude the fixed overheads as these are already absorbed in the current production activity of 120,000 fans.

As a minimal the Stella Corp. should be able to cover the variable costs resulting from the special offer calculated as below

Costs to provide for the special Order. per fan

Direct materials $ 8 .00

Direct labor $ 9.00

Manufacturing Overhead $10 × 70% $ 7.00

Shipping Costs $ 4.00

Total $28.00

Therefore, Stella Corp. should use $28.00 as a minimum selling price per fan in negotiating a price for this special order.