Question

Younes Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as P06. Data concerning this product are given below:

	Per Unit
Selling price	$	220
Direct materials	$	38
Direct labor	$	1
Variable manufacturing overhead	$	8
Fixed manufacturing overhead	$	16
Variable selling expense	$	4
Fixed selling and administrative expense	$	16

The above per unit data are based on annual production of 4,000 units of the component. Assume that direct labor is a variable cost.

The company has received a special, one-time-only order for 500 units of component P06. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. However, assume that Younes has no excess capacity and this special order would require 30 minutes of the constraining resource, which could be used instead to produce products with a total contribution margin of $10,000. What is the minimum price per unit below which the company should not accept the special order?

Multiple Choice

• $67 per unit

• $103 per unit

• $20 per unit

• $83 per unit

Answer 1

Answer : Minimum price per unit below which the company should not accept the special order = $67 per unit

Explanation :

Minimum Price = Cost of accepting the special order per unit + Loss of contribution margin on accepting the special order per unit (since Younes Inc. doesn't have access capacity)

Since, it is given that on accepting the special order there will be no variable selling expenses and fixed manufacturing overhead and fixed selling and administrative expenses will not be affected.

Cost of accepting the special order = Direct Materials + Direct Labor + Variable Manufacturing Overheads

Direct Materials = $38 per unit (Given)

Direct Labor = $1 per unit (Given)

Variable Manufacturing Overheads = $8 per unit (Given)

Cost of accepting the special order per unit = $38 + $1 + $8

= $47

Cost of accepting the special order = Cost of accepting the special order per unit * Number of units of special order

= $47 * 500

= $23,500

Since, Younes Inc. doesn't have excess capacity, it will have to give up some units in order to produce the special order. Therefore, contribution margin of units given up will be lost on accepting the special order.

Therefore, Loss of contribution margin on accepting the special order = $10,000

Minimum Price per unit = (Cost of accepting the special order + Loss of contribution margin on accepting the special order) / Number of Units of Special Order

= ($23,500 + $10,000) / 500

= $33,500 / 500

= $67

Therefore, minimum price per unit below which the company should not accept the special order is $67 per unit.

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