Question

Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 49,000 units per month is as follows:

Direct materials	$27.00
Direct labor	$7.70
Variable manufacturing overhead	$3.30
Fixed manufacturing overhead	$12.50
Variable selling & administrative expense	$2.80
Fixed selling & administrative expense	$6.00

The normal selling price of the product is $52.00 per unit.
An order has been received from an overseas customer for 2,900 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.10 less per unit on this order than on normal sales.

  

Direct labor is a variable cost in this company.

  

Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 290 units for regular customers. The minimum acceptable price per unit for the special order is closest to:

$41.82

$40.80

$52.00

$44.90

Answer 1

• Minimum acceptable price = Variable cost to be incurred in producing those 2900 units + Any avoidable Fixed Cost + Contribution margin to be lost.
• Step 1: Contribution margin to be lost due to special order

A	Normal Sales Price per unit	$                   52.00
	Variable cost per unit:
	Direct Material	$                   27.00
	Direct Labor	$                     7.70
	Variable manufacturing overhead	$                     3.30
	Variable selling & administrative overhead	$                     2.80
B	Total Variable cost per unit	$                   40.80
C = A - B	Contribution margin per unit on normal sales	$                   11.20
D	No. of sales unit lost due to order	290
E = C x D	Contribution margin lost	$             3,248.00

• Step 2: Avoidable Fixed Cost = NIL, because the question says “This order would not change the total amount of the company's fixed costs.”
• Step 3: Variable cost to produce 2900 units

	Variable cost per unit:
	Direct Material	$                   27.00
	Direct Labor	$                     7.70
	Variable manufacturing overhead	$                     3.30
	Variable selling & administrative overhead	$                     2.70
A	Total Variable cost per unit	$                   40.70
B	Units under special order	2,900
C = A x B	Total relevant variable cost	$        118,030.00

• Step 4: Answer, calculation

A	Total relevant variable cost	$        118,030.00
B	Contribution margin lost	$             3,248.00
C = A+B	Total relevant Cost for order	$        121,278.00
D	No. of units	2,900
E = C/D	Minimum Acceptable price per unit	$                   41.82 = Answer

• Correct Answer = Option #1 $ 41.82