Question

Assume that MTA Sandwiches sells sandwiches for $3.55 each. The cost of each sandwich follows:

Materials	$	1.10
Labor		0.40
Variable overhead		0.20
Fixed overhead ($23,500 per month, 18,800 units per month)		1.25
Total cost per sandwich	$	2.95

One of MTA's regular customers asked the company to fill a special order of sandwiches at a selling price of $2.30 each for a fund-raising event sponsored by a social club at the local college. MTA has capacity to fill it without affecting total fixed costs for the month. MTA's general manager was concerned about selling the sandwiches below the cost of $2.95 per sandwich and has asked for your advice.

Required:

a. Prepare a schedule to show the impact on MTA's profits of providing 400 sandwiches in addition to the regular production and sales of 18,800 sandwiches per month. (Select option "higher" or "lower", keeping Status Quo as the base. Select "None" if there is no effect.)

b. Based solely on the data given, what is the lowest price per sandwich at which the special order can be filled without reducing MTA's profits? (Round your answer to 2 decimal places.)

Answer 1

Solution:

Part a ---

The company has the capacity to produce special order units without losing their regular sales and affecting total fixed costs.

In this type of question relevant cost related to special order should be considered.

Relevant Cost is the cost which incur in future and different under each alternative course of action.

In the given question, the following variable costs are relevant cost related to the special order

Material cost per sandwich	$1.10
Labor cost per sandwich	$0.40
Variable Overhead per sandwich	$0.20
Total Relevant cost per sandwich	$1.70

Note – Fixed Costs are sunk cost because this cost has already been incurred. Fixed Costs are treated as period cost hence not relevant for decision making. It does not play any role in decision making. Fixed Cost will continue to incur whether company accept special order or not. It will remain same, hence it does not fulfil the condition of relevant cost i.e. future cost and different under each alternative course of action. Fixed Costs will not incur in future and not related to the special order hence it is treated as irrelevant cost for the pricing of special order.

Schedule of showing impact on profit of the company

	$$
Selling Price of Special Order per sandwich	$2.30
Less: Relevant Cost per Sandwich	$1.70
Profit per sandwich from special order	$0.60
Number of Sandwich	400
Increase in profit from special order (400*$0.60)	$240

The MTA’s profit will be HIGHER/ Increased by $240 if special order is accepted.

Part b --

The lowest price per sandwich at which the special order can be filled without reducing MTA’s Profit is the relevant cost per sandwich since this is the cost which will incur in future if special order will produce.

So the lowest price per sandwich = $1.70 per sandwich

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you