Question

Kanada Inc. currently produces a product with the following cost characteristics:

Selling price	$85
Variable costs – production	31
Variable costs – selling and administrative	10
Total fixed costs	$957458

Plant capacity	40542
Current product/sales volume	36429

Kanada Inc. can purchase additional capacity at a cost of $31426 in increments of 2730 units. A customer approaches AB Inc. for a special one-time order to purchase 9573 units. 62% of current variable selling and administrative costs would be incurred with this order.

Assuming Kanada Inc. would purchase additional capacity, what is the minimum acceptable per unit price for this order?

Answer 1

Excess capacity exist: Plant capacity- Current production = 40542 - 36429 = 4113 units

Special order quantity: 9573 units

Additional capacity required: 9573 - 4113 = 5460 unist (that means additional cost to be incurred twice for 5460 units)

Additional fixed cost to be incurred for Special order (31426*2) = $ 62852

Add: Variable cost for 9573 units:

Variable production cost (9573 units @ 31):                                  $ 296,763

Variable selling expense (9573 units @ 6.20 per unit)                   $ 59,353

Total cost to be incurred on Special order:                                     $ 418,968

Number of units in Special order:                                                      9573 units

Therefore, Minimum Selling price acceptable ($ 418,968 / 9573 units) = $ 43.77 per unit