Question

ley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 47,000 units per month is as follows:

Direct materials	$25.00
Direct labor	$7.50
Variable manufacturing overhead	$3.10
Fixed manufacturing overhead	$12.30
Variable selling & administrative expense	$2.60
Fixed selling & administrative expense	$5.80

The normal selling price of the product is $51.80 per unit.
An order has been received from an overseas customer for 2,700 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.20 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 270 units for regular customers. The minimum acceptable price per unit for the special order is closest to:

Answer 1

Contribution margin per unit earned from existing customer:
Selling price per unit				51.8
Less: variable cost
Material				25
labour				7.5
Variable manufacturing OH				3.1
Variable Selling and admin expense				2.6
Contribution margin per unit earned from existing customer:				13.6
Manufacturing cost per unit for Special order:
Material cost per unit				25
Labour Cost per unit				7.5
Variable manufacturing OH				3.1
Variable Selling Oh (2.60-0.20)				2.4
Total Incremental cost per unit				38
Now, The minimum acceptable price per unit is computed as follows:
Cost of manufacturing of 2700 units (2700*38)					102600
Add: Loss of Contribution of 270 units (270*13.60)					3672
Total sales price for 2700 units					106272
Selling price per unit		(106272/2700)			39.36
Therefore, Minimum Selling price for speecial order is $ 39.36 per unit