Question

The minimum acepted price for a special order would cover:

Multiple Choice

• only fixed costs associated with the special order.

• All variable and fixed manufacturing costs associated with the special order.

• variable cost and any incremental fixed costs associated with the special order.

Answer 1

Answer: Option C. variable cost and any incremental fixed costs associated with the special order

Minimum accepted price is price at which decision is indifferent. In simple terms Price at profit and loss is ZERO

Variable cost is directly associated and increase with increase in production and thus it primarily should recovered. Fixed cost is absorbed in nature and does not change with change in production activity. Example is Factory rent. If the special order accepted or not rental expenses will occur, However sometimes accepting special order company may have to incurred incremental fixed cost (Example: Buying of new technology machinery to produce for special order) and thus it also to be part of minimum recovery i.e Minimum accepted price for special order.

Thus, Minimum accepted price for a special order would cover variable cost and any incremental fixed costs associated with the special order

Note:

For option a: only fixed costs associated with the special order.

As we discussed above, Variable cost is product cost which is directly incurred at the time of production of goods.

Thus, only fixed costs associated with the special order not sufficient to accepted the special order.

Therefore, Option a. is incorrect

For option b: All variable and fixed manufacturing costs associated with the special order.

As discussed, Fixed cost associated with special order is not to be charge to special order. Only incremental fixed cost to be considered.

Therefore, Option b. is incorrect