Question
In: Accounting
Peggy Company makes and sells a product that normally sells for $57. Because of a defective...
Peggy Company makes and sells a product that normally sells for $57. Because of a defective machine, 1,000 units were not produced correctly and remain in inventory. Each of the defective unit has the following costs assigned to it by the company's absorption costing system:
| Direct materials | $6.00 per unit |
| Direct labor | $2.00 per unit |
| Variable Overhead | $2.25 per unit |
| Fixed Overhead | $1.8 per unit |
The company has two options regarding the defective units: (1) be sold for $8 per unit, or (2) repaired and sold at the regular price.
Q.) What is the minimum cost of repair per unit in order for the company to choose option (1)?
A.) $ per unit
Solutions
Expert Solution
| The maximum amount that the company can spend will be equal to the point where the contribution from such sale is zero. | |||||||||||||
| Maximum repair cost = Sales price - Direct materials - Direct labor - Variable overhead | |||||||||||||
| $57 - $6 - $2 - $2.25 | |||||||||||||
| 46.75 | |||||||||||||
| If the company spends $46.75 for repair, the total variable cost of one unit will be $57 | |||||||||||||
| And therefore the contribution from sale of such repaired unit will be zero. | |||||||||||||
| Any repairs beyond $46.75 will result in negative contribution. | |||||||||||||
| Therefore, | |||||||||||||
| Maximum cost of repair per unit in order for the company to choose option 2 | $46.75 | Per unit | |||||||||||
ekkarill92 answered 2 years agoRelated Solutions
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