Special Order: A customer has requested that Beta Inc, fill a special order for

Question

Special Order: A customer has requested that Beta Inc, fill a special order for 2,000 unites of product K for $25.00 per unit. Product K unit product cost is computed as follows:
Direct Materials: $5.6
Direct Labor: $4
Variable Manufacturing Overhead: $2.70
Fixed Manufacturing Overhead $7.60
Unit Product Cost: $19.90
Assume that all direct labor is a variable cost. The special order would have no effect on the company's fixed manufacturing overhead cost. The customer would like to make modifications to product K that would increase variable costs by $1.20 per unit and would require an investment of $10,000 in special molds that would have no salvage value. This special order would have no effect on the computer's other sales. The company has sufficient spare capacity for producing the special order. What is the lowest price the company should charge the customer for this special order?

Explanation / Answer

Answer:

As there is sufficient spare capacity for the special order, the relevant cost for the special order is the variable cost to be incurred plus the investment in the special molds.

Relevant Cost for the special order per unit Variable Costs: In $ Add: Direct Materials 5.6 Add: Direct labor 4 Add: Variable Manufacturing Overhead 2.7 Add: Increase in variable cost due to modification 1.2 = Relevant cost p.u.(excluding special molds) 13.5 Secial Order (no. of units) 2000 Total Relevant cost(excluding special molds) 27000 Add: Investment in special molds 10000 Total Relevant cost(Including special molds) 37000 Lowest chargeable price($37,000/2000) 18.5

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