Salisbury Corporation has been producing and selling 30,000 caps a year. The company has the capacity...

Salisbury Corporation has been producing and selling 30,000 caps a year. The company has the capacity to produce 40,000 caps with its present facilities. The following information is also available:

Selling price per unit:$35

Variable Manufacturing:$14

Variable selling and Admin:$6

Fixed Manufacturing: $128,000

Fixed Selling and Admin: $56,000

Gilbert Company has contacted Salisbury about purchasing 12,000 units at $24 each. A new customer who wants 20,000 units (all or nothing) right now also contacted Salisbury. Salisbury has to reduce its existing sales when selling either to Gilbert or to the new customer. For the new customer, variable selling and admin costs would not be incurred. Unfortunately, Salisbury cannot sell both to Gilbert Company and the new customer. What is Salisbury's minimum price to accept the offer from the new customer (instead of Gilbert Company)?

Note:I have seen so many different answers for this same question. Please answer this question if you are really sure. Thank you in advance.

Expert Solution

Note 1 : Salisbury maximum production capacity is 40,000 units & its existing sales is of 30,000 units . Thus if Salisbury accepts the offer from the new customer for 20,000 units then it's existing sales reduced to 20,000 units. Therefore has to reduction in existing sales if accepting offer from the new customer = 30,000 - 20,000 = 10,000 units. Thus company will lose total contribution margin for 10,000 units for accepting the offer .

Total contribution lost for accepting offer from the new customer = ($35 - $14 - $6) * 10,000 = $150,000

Note 2: When the company reduce its existing sales for any new order or customer , minimum price to accept the offer from the new customer should consists of : Applicable variable cost for the order + Contribution lost per unit.

Applicable variable cost for the order (ie only variable manufacturing cost) = $14.
Contribution lost per unit = Total contribution lost for accepting offer from the new customer / Units of new order = $150,000 / 20,000 units = $7.5

Salisbury's minimum price to accept the offer from the new customer = $14 + $7.50 = $21.50

ekkarill92 answered 2 years ago

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