Question

Accepting Business at a Special Price

Forever Ready Company expects to operate at 82% of productive capacity during July. The total manufacturing costs for July for the production of 36,900 batteries are budgeted as follows:

Direct materials	$368,900
Direct labor	135,600
Variable factory overhead	37,930
Fixed factory overhead	76,000
Total manufacturing costs	$618,430

The company has an opportunity to submit a bid for 3,000 batteries to be delivered by July 31 to a government agency. If the contract is obtained, it is anticipated that the additional activity will not interfere with normal production during July or increase the selling or administrative expenses.

What is the unit cost below which Forever Ready Company should not go in bidding on the government contract? Round your answer to two decimal places.
$ per unit

Answer 1

Special order pricing is a technique used to calculate the lowest price of a product or service at which a special order may be accepted and below which a special order should be rejected. Usually a business receives special orders from customers at a price lower than normal.

Working for Special Price

Total Manufacturing Cost	$618430
Less : Fixed Cost (Explain Below )	$76000
Total Variable Cost (or can be taken as DM+DL+VFOH)	$542430
Total Variable cost per unit (july production 36900unit)	$14.7/unit

Total variable cost per unit = $542430/36900=$14.7, Hence below this price company should not accept the order as it is the cost of making of additional unit

As Given in the question is special order will not affect the normal working of the production which means that the normal production will cover up all the budgeted fixed overhead as it is based on normal july production capacity hence will not be consider in Special price as company is not going to incurred the additional fixed cost