Question

Crystal has received a special order for 1,900 units of its product. The product normally sells for $380 and has the following manufacturing costs:

	Per unit
Direct materials		$	103
Direct labor			76
Variable manufacturing overhead			38
Fixed manufacturing overhead			19
Unit cost		$	236

Crystal is currently operating at full capacity and cannot fill the order without harming normal production and sales. What minimum price should Crystal charge to earn an incremental profit of $28,500?

Multiple Choice

• $395

• $380

• $319

• $338

Answer 1

Answer)

Calculation of minimum price to be charged per unit of the special order in order to earn a profit of $ 28,500

Minimum price will be based on the minimum price plus target profit.

Where,

Relevant cost = Cost to be incurred due to acceptance of special order + benefit to be lost due to acceptance of special order

Relevant cost of acceptance of special order:	Amount
Cost to be Incurred:
Direct Materials (1,900 units X $ 103 per unit )	$ 195,700
Direct Labor (1,900 units X $ 76 per unit )	$ 144,400
Variable Manufacturing Overhead (1,900 units X $ 38 per unit )	$    72,200
Benefit to be lost:
Opportunity Cost (1,900 units X $ 163 per unit)	$ 309,700
Total Relevant cost (A)	$ 722,000
Target Incremental Profit (B)	$    28,500
Minimum Sales revenue (A) + (B)	$ 750,500
Number of units to be sold (C)	1,900
Minimum Price per unit to be charged [(A) + (B)]/ (C)	$          395

Therefore minimum price to be charged for each units of special order will be $ 395.

Notes:

· The company is operating at full capacity. Any unit to be manufactured for the special order will have to be cut back from regular sales. Therefore contribution margin to be lost due to acceptance of special order will be charged from the special order.

· Cost to be incurred will included all variable costs – Direct Materials, Direct Labor and Variable manufacturing overheads.

· Fixed manufacturing overhead cost is not a relevant cost for the special order as there will not be any increase in this cost due to acceptance of special order.

Working Note:

Contribution margin per unit for regular sales = Selling price per unit for regular sales – direct material cost per unit – Direct labor cost per unit – variable manufacturing overheads per unit

                                                                          = $ 380 per unit - $ 103 per unit - $ 76 per unit - $ 38 per unit

                                                                    = $ 163 per unit.