Question

In: Accounting

11 The Casablanca Company manufactures a part with these details per unit: Selling price $150 Direct...

11 The Casablanca Company manufactures a part with these details per unit:

Selling price $150 Direct materials $20 Direct labor $15 Variable manufacturing overhead $12 Fixed manufacturing overhead $30 Shipping and handling costs $4 Fixed selling and administrative $10 Total costs $91

The company has received a special, one-time order for 1,000 parts. The company is operating at full capacity. The contribution of the output that would be displaced by the special order is: $10,000 Required: What is the minimum price for accepting the special, one-time order?

Expert Solution

Statement showing minimum price for accepting one time order

	Cost per unit	Amount
Variable cost incurred:
Direct materials	$20	$20,000
Direct labor	$15	$15,000
Varibale manufacturing overhead	$12	$12,000
Shipping and handling cost	$4	$4,000

Total variable cost to be incurred	$51	$51,000
Add contribution of old units lost (opportunity cost		$10,000

Total cost to be incurred due to order

$61,000

Minimum price per unit for accepting one time order=Total cost/Units sold

=$61,000/1,000

Minimum price per unit for accepting one time order=$61

Notes-

Direct materials= $20*1,000= $20,000

Direct labor= $15*1,000=$15,000

Variable manufacturing overhead= $12*!,000=$12,000

Shipping and handling cost= $4*1,000= $4,000

Total direct cost related to manufacturing which are required to be incurred for production are all relevant for decision and are relevant cost

Contribution lost on the other output lost should be recovered from special order so it is a opportunity cost, the cost lost due to accepting the order and is thus relevant for business.

Fixed manufacturing and overhead cost and fixed selling and overhead expenses will be incurred even if the order is not taken so they are sunk cost not relevant for decision.That is in deciding the minimum price.

Shipping and handling cost are variable and thus relevant for decision making

Hope it helps!!

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ekkarill92 answered 2 years ago

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