Name on Request Company produces a single product called Thing. The company norm
ID: 2462378 • Letter: N
Question
Name on Request Company produces a single product called Thing. The company normally produces and sells 50,000 Things each year at a selling price of $50 per unit, The company's unit costs and total costs at this level is given below:
Direct Materials
Unit Cost
$15
Total Cost
$750,000
Direct Labor
8
400,000
Variable Manufacturing Overhead
3
150,000
Fixed Manufacturing Overhead
9
450,000
Variable Selling Expenses
4
200,000
Fixed Selling Expenses
6
300,000
Cost per Unit and Total Cost
$45
$2,250,000
Answer the SIX questions below relating to the production and sale of Things. NOTE: Each question is INDEPENDENT.
4. The company has 1,847 Things on hand that have some irregularities and are therefore considered to be "seconds". Due to the irregularities, it will be impossible to sell the Things at th normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling price? Also, explain your reasoning.
Direct Materials
Unit Cost
$15
Total Cost
$750,000
Direct Labor
8
400,000
Variable Manufacturing Overhead
3
150,000
Fixed Manufacturing Overhead
9
450,000
Variable Selling Expenses
4
200,000
Fixed Selling Expenses
6
300,000
Cost per Unit and Total Cost
$45
$2,250,000
Explanation / Answer
In order to set the minimum selling price - Direct Materials, Direct Labor, Variable Manufacturing OH and Variable Selling Expenses are relevant as these are the costs which are incurred for these 1847 units specifically. The fixed costs are irrelevant because even if these units were not produced, the fixed costs would have been incurred. Hence, in order to determine the minimum selling price, the direct traceable costs are relevant and the minimum selling price should be - ($15 + $8 + $3 + $4) = $30
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