1 am looking for the answer to question 4 Question 3-Below are the production an
ID: 2341730 • Letter: 1
Question
1 am looking for the answer to question 4 Question 3-Below are the production and cost information for ABC company. They have a total annual production of 10,000 units. They want to sell their product at a 15% mark up over cost. What is their per unit price? Variable Direct Costs Fixed Direct Costs Variable Operating Costs Fixed Operating Costs Total Costs 500,000 350,000 200,000 700,000 1,750,000 Answer $201.25 Question 4- Using the information from question 3... XYZ received on additional order at the end of the year. They will end up making 200 more units Which approach will direct them to using only relevant costs to price the special order? Absorption Approach Contribution Approach Either ApproachExplanation / Answer
As per relevent costing method all fixed costs are considered as sunk cost and it is not taken in the calculation. Relevent cost only reflects the incremental costs .
CASE 1 : if absorption approach is considered , it takes into account all the the direct and indirect expenses including the fixed costs . This is against the priciples of relevent costing which takes only the incremental costs .
CASE 2: if contribution approach is considered , it takes into account the variable direct and indirect costs only which are incremental in nature and more over relevent to the particular project . this correctly accounts for the icremental costs to price the special order
DECISION: therefore contribution approach is to be considered
Calculation of contribution by making 200 more units
selling price per unit 201.25 $
[mentioned in question 3]
less : variable direct cost per unit 50.00 $
[500,000 $/ 10,000 units]
less: variable operating cost per unit 20.00 $
CONTRIBUTION PER UNIT 131.25 $
therefore additional contribution by producing 200 units = 200 *131.25 $
= 26,250 $
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