(14) Elhard Company produces a single product. The cost of producing and selling

Question

(14) Elhard Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 27,000 units per month is as follows:

An order has been received from an overseas customer for 1,900 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.20 less per unit on this order than on normal sales.

Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 190 units for regular customers. The minimum acceptable price per unit for the special order is closest to: (Round your intermediate calculations and final answer to 2 decimal places.)

(14) Elhard Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 27,000 units per month is as follows:

Explanation / Answer

Total variable unit costs for regular order = 17+6.70+2.30+1.80 = 27.80

Total variable unit costs for special order = 17+6.70+2.30+(1.80-0.20) = 27.60

So total variable costs for 1900 units = 27.60*1900 = 52,440

However taking up this special order will mean losing out on contribution from 190 units of regular order. Contribution from 190 units of regular order = (51-27.80)*190 = 4,408

So total direct costs for special order = 52,440+4,408 = 56,848

So minimum accepable price = total direct costs / no of units = 56,848/1900 = $ 29.92

Hope this helped ! Let me know in case of any queries.

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