Pratt Company is currently operating at a loss of $15,000. The sales manager has

ID: 2357793 • Letter: P

Question

Pratt Company is currently operating at a loss of $15,000. The sales manager has received a special order for 5,000 units of product, which normally sells for $35 per unit. Costs associated with the product are: direct material, $6, direct labor, $10, variable overhead, $3, applied fixed overhead, $4; and variable selling expenses, $2. The special order would allow the use of a slightly lower grade of direct material, thereby lowering the price per unit by $1.50 and selling expenses would be decreased by $1. If Pratt wants this special order to increase the total net income for the firm to $10,000, what sales price must be quoted for each of the 5,000 units?

Explanation / Answer

In order to increase income to $10,000, there must be an increase of $25,000 or $5 per unit.

Direct materials

$ 4.50

Direct Labor

10.00

Variable Overhead

3.00

Variable Selling Exp

1.00

Production Costs

$18.50

Additional profit per unit

5.00

Sales price/unit

$23.50

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