Question

The Melrose Corporation produces a single product, Product C. Melrose has the capacity to produce 96,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows:

Direct materials	$	29.10
Direct labor	$	22.20
Variable manufacturing overhead	$	16.90
Fixed manufacturing overhead	$	20.50
Variable selling expense	$	14.60
Fixed selling expense	$	9.30

The regular selling price of one unit of Product C is $129.60. A special order has been received by Melrose from Moore Corporation to purchase 8,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special order. The machine will cost $9,000 and will have no use after the special order is filled. Assume that direct labor is a variable cost.

Assume that Melrose expects to sell 86,000 units of Product C to regular customers next year. At what selling price for the 8,000 units would Melrose be economically indifferent between accepting and rejecting the special order from Moore?

$94.98

$93.48

$71.48

$72.98

Answer 1

Calculate selling price

Direct material	29.10
Direct labor	22.20
Variable manufacturing overhead	16.90
Variable selling expense (14.60*25%)	3.65
Special machine (9000/8000)	1.125
Selling price	72.975

So answer is d) $72.98