Question

Tommy Company makes a product, X-10. It has a production capacity of 10,000 units. The regular selling price is $135 each. Tommy has received a request from Chully for a special order of 1,000 units of X-10. Only for this order, no variable selling cost would be incurred. The following is the per-unit cost information:

Direct materials (Variable)	$10
Direct labor (Variable)	$35
Variable overhead	$25
Fixed overhead	$30*
Unit product cost	$100
Variable selling	$6
Fixed selling	$4*
Unit selling cost	$10
Total cost for 1 unit	$110

            * based on production and sales of 10,000 units

1. Chully has suggested a price is $95 per unit. Tommy can satisfy this order without sacrificing production and sales for the regular customers. If Tommy accepts this special order, what would be the effect on the company’s profit? Indicate the direction (increase or decrease) and amount (by how much).

2. Assume that Tommy can sell all 10,000 units to its regular customers for $135 each. For each unit Tommy sells to Chully, Tommy has to give up selling to its regular customer. In this situation, Tommy has to charge at least $______ to Chully.  

Answer 1

Answer 1

Calculating net gain / (loss) of accepting the special order:
Sales (Units)	1000
Sales ($)	95000
Relevant Costs ($):
Direct materials	10000
Direct labor	35000
Variable overhead	25000
Total Relevant Costs ($)	70000
Net gain of accepting the special order	25000

Answer 2

Calculating relevant gain per unit from normal sales
	Per Unit ($)
Selling Price	135
Costs:
Direct materials	10
Direct labor	35
Variable overhead	25
Variable selling	6
Total Per Unit Cost	76
Net Gain per unit from normal sales	59
Calculating minimum amount to be charged from Chully:
Relevant Cost Incurred per unit:
	Amt in $
Direct materials	10
Direct labor	35
Variable overhead	25
Net Gain per unit from normal sales [as calculated above]	59
Total price per unit to be charged from chully	129
Total price to be charged from chully for 1000 units	129000