GIVEN: Kann Corporation produces industrial robots for high-precision manufactur
ID: 2427958 • Letter: G
Question
GIVEN: Kann Corporation produces industrial robots for high-precision manufacturing. The following information is available:
Per Unit Total
Direct materials $25.00
Direct labor $10.00
Variable manufacturing overhead $6.00
Fixed manufacturing overhead $36,000
Variable selling and administrative costs $4.00
Fixed selling and administrative costs $15,000
The company has a desired ROI of 20%. It has invested assets of $420,000. It anticipates making and selling 3,000 units per year.
(Questions 1-4 were answered in an earlier post; I imagine that doing all of them at once was too much, so I'm re-posting with parts 5-7.)
REQUIRED:
Part 5: What else should be considered when setting the product's selling price?
Part 6: Which of the three costing concepts would be most appropriate in each of the following situations? 1. External reporting for GAAP 2. Normal (long-run) pricing 3. Evaluating special orders
Part 7: Kann Corporation received a special order for 500 robots at $50 each from a foreign customer. Acceptance of the order would increase variable selling costs by $1.70 per unit because of shipping costs, but would not increase fixed costs or interfere with any current orders. Prepare a differential analysis to determine whether the special order should be accepted or not.
Explanation / Answer
Part 5:
While setting the product’s selling price few costs must be considered which are given as follows.
Above mentioned costs are both variable and fixed costs and added by desired profit. Apart from the above costs, while setting the selling price factors like customer behavior, customer preference, durability of the product, worth of the product with that price should be considered.
Part 6:
Part 7:
Prepare a differential analysis to determine whether the special order should be accepted or not:
Details
Rejecting Special
order
Accepting Special
order
Differential
cost
Selling price
$ 50.00
$ 50.00
Direct material
$ 25.00
$ 25.00
$ -
Direct labor
$ 10.00
$ 10.00
$ -
Variable manufacturing overhead
$ 6.00
$ 6.00
$ -
Variable selling and administrative costs
$ 4.00
$ 4.00
$ -
Shipping variable cost
$ -
$ 1.70
$ 1.70
Total variable cost per unit
$ 45.00
$ 46.70
$ 1.70
As total variable cost ($46.70) is less than selling price of $50, it is advisable to accept the special order. An important factor is in accepting the special order no fixed cost is increased. Therefore, total net income of the company would increase if special order is accepted.
Details
Rejecting Special
order
Accepting Special
order
Differential
cost
Selling price
$ 50.00
$ 50.00
Direct material
$ 25.00
$ 25.00
$ -
Direct labor
$ 10.00
$ 10.00
$ -
Variable manufacturing overhead
$ 6.00
$ 6.00
$ -
Variable selling and administrative costs
$ 4.00
$ 4.00
$ -
Shipping variable cost
$ -
$ 1.70
$ 1.70
Total variable cost per unit
$ 45.00
$ 46.70
$ 1.70
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