Watches Inc. makes a watch selling for $50 per unit. Operating within its releva

Question

Watches Inc. makes a watch selling for $50 per unit. Operating within its relevant range they have excess capacity to make 200,000 watches. The unit costs for financial statement purposes are $10 for direct materials, $7 for direct labor, $5 for variable overhead and $12 in fixed costs. The company has been offered a special order for 5,000 military watches that are identical to the current product but will require an additional $2 each for a special fitting. What is the incremental breakeven selling price per unit for the special order? a.$34 b.$24 c.$22 d. $39 e. None of the above values are correct. Using the information from the previous question, what should be the special order price per watch for the company to increase its

Explanation / Answer

The problem is answered as below. a) Given that the Watches Company has an excess capacity of 200000 watches which means that there is no extra capacity (oppurtunity) cost decision making. The fixed costs are period costs and occur same whether the offer of military watches manufacturing is accepted or not .Hence irrelevant for decision making. So,the costs that are considered are dirct materials,direct labour,variable overhead and additional special fitting which is $10+$7+$5+$2 = $24 Incremental Breakeven selling price is determined at the price where the incremental costs equals to the incremental revenues.Here ,the total incremental costs = $24. Hence,The incremental Breakeven selling price = $24 Option b.)$24 is correct b) The special order Selling price per watch when Incremental Net profit = $25000 is calculated as below Sales - Variable Cost - fixed costs = Net Profit Let "x " be the selling price and total incremental units = 5000 units Therefore 5000(x)-(5000)(24) = $25000 ( Since variable cost calculated above = $24) 5000(x-24) = $25000 => x-24 = 5 x= 5+24 = $29 Therefore the Selling price should be $29 Option C) $29 is correct

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