Question

In: Accounting

Landor Appliance Corporation makes and sells electric fans. Each fan regularly sells for $32. The following...

Landor Appliance Corporation makes and sells electric fans. Each fan regularly sells for $32. The following cost data per fan is based on a full capacity of 160,000 fans produced each period. Direct materials$9Direct labor$9Manufacturing overhead (50% variable and 50% unavoidable fixed)$6 A special order has been received by Landor for a sale of 30,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be $3 per fan for shipping. Landor is now selling 130,000 fans through regular channels each period. Assume that direct labor is an avoidable cost in this decision. What should Landor use as a minimum selling price per fan in negotiating a price for this special order? Garrison 16e Rechecks 2017-11-13rev: 04_26_2018_QC_CS-125865, 09_07_2018_QC_CS-136851Multiple Choice$24 per fan$28 per fan$22 per fan$21 per fan

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Expert Solution

Answer: $24 per fan

Explanation:

Special order In cost accounting, a special order is a one time customer order, often involving a large quantity and a low price.This is a chance to make money or lose money . Tough choice.

A special order requires you to make decisions using relevant information . You decide which costs and revenue are relevant .Based on your analysis, you make a decision designed to maximize your profit.

Keep the following points in mind when you are considering special orders:

(i) Because you are already in business to produce other goods, , assume that your fixed cost are being paid for from your regular production

(ii) A special order can be filled only if you have excess capacity. You must have the ability to perform the work.

(iii) You can accept a lower sales price for a special order and still be profitable. The fixed costs have already been paid for with earlier production.They are past (sunk) costs, so you do not need to worry about covering them with special order revenue

(iv) Variable costs are a part of your special order calculation. Variable costs are always relevant to a special order.

*In this case direct labor is an avoidable cost.

Avoidable costs represent costs that will no longer be incurred if a decision is made to outsource a particular activity or component. The classification of costs as avoidable and unavoidable is important as only avoidable costs will be relevant in the decision process unavoidable costs will be incurred regardless of the choice made.

Special order proposal:

Units poduced: 30000 by utilizing remaning capacity i.e. 18.75% (30000/160,000*100)   

Variable cost cost per unit   

Direct material $9

Direct labor $9

Manufacturing overhead $3

Selling cost (shipping)     $3

$24

Minimum selling price per fan = $24

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