Your Company produces a single product. The cost of producing and selling a sing

Question

Your 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 43,000 units per month is as follows:

Direct material                                                            $55.00

Direct labor                                                                     6.00

Variable manufacturing overhead                                   3.00

Fixed manufacturing overhead                                   15.00

Variable selling and administrative expense                   3.00

Fixed selling and administrative expense                   10.00

The normal selling price of the product is $100.00 per unit.
An order has been received from an overseas customer for 5,000 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 $2.00 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.

Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $90.00 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

c. 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 3,000 units for regular customers. What would be the minimum acceptable price per unit for the special order?

Explanation / Answer

Current Cost structure Details Amt $/ Unit Total cost per month Selling Price 100 Direct Material cost 55 Direct Labor cost 6 Variable Mfg OH 3 Variable selling & Admin 3 Total Variable cost 67 Contribution /unit 33 Fixed Mfg OH       645,000 Fixed Selling & Admin exp       430,000 Ans a Special Order Units             5,000 Details Cost/ Unit Total Amt $ Sales price                   90       450,000 Direct Material cost                   55       275,000 Direct Labor cost                      6         30,000 Variable Mfg OH                      3         15,000 Variable selling & Admin                      1           5,000 Total Variable cost                   65       325,000 Contribution Margin                   25       125,000 As the fixed costs will not change , the total operating margin of the firm will increase by $125,000 for the month. Ans b. The contribution margin difference of existing product and Special order is $8 per unit.($33-$25). So when capacity is full and special order is delivered by reducing regular product, the opportunity cost of each unit will be $ 8. Ans c. If the regular product is sold 3000 units less , then contribution loss is 3000*$33 =$99000. So 5000 units should earn $99000 extra or each unit should earn $19.8 extra. So the revised selling price should be $90+$19.8 =109.8 to cover the loss of contribution. So required revised price is $ 109.80

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