Question

Laporte Company (special order, short-term pricing; adapted from Cheng) Laporte Company produces a single product L1.

The following is information pertaining to the selling price and variable costs of L1:

Selling price $200 per unit
Direct material $60 per unit
Direct manufacturing labor (2 DML hrs. at $10 per hr.) $20 per unit
Variable overhead (4 machine hrs. at $10 per hr.) $40 per unit
Variable selling and admin. 20% of total sales dollars

The monthly fixed costs for Laporte are as follows:
Fixed overhead $40,000
Fixed selling and admin. $9,000

Laporte has a maximum of 8000 machine hours available each month and Laporte will be unable to purchase new machines in the short run. Assume that Laporte is currently producing and selling 1500 units of L1 per month. The company receives a special order to produce more L1 in the upcoming month. It will cost an additional $2,400 in fixed costs to fill the special order and no variable selling and administrative costs will be incurred on the special order. The special order must be accepted or rejected in its entirety.

1. What is the minimum selling price per unit that Laporte is in theory willing to accept for the special order if the order calls for 400 units?
2. What is the minimum selling price per unit that Laporte is in theory willing to accept for the special order if the order calls for 800 units?

Answer 1

Capacity of units can be sold = 8,000/4 = 2,000 units

1.

	Unit Price	Qty	Amount
Direct Material	60.00	400.00	24,000.00
Labor	20.00	400.00	8,000.00
Variable Overhead	40.00	400.00	16,000.00
Additional Fixed Cost			2,400.00
	Total Cost	50,400.00

Minimum Price = 50,400/400

= 126

2.

	Unit Price	Qty	Amount
Direct Material	60.00	800.00	48,000.00
Labor	20.00	800.00	16,000.00
Variable Overhead	40.00	800.00	32,000.00
Additional Fixed Cost			2,400.00
Contribution lost on 300 Units	40.00	300.00	12,000.00
	Total Cost	110,400.00

Minimum Price = 110,400/800

= 138