Buxton Company is currently operating at a loss of $15,000. The sales manager ha

Question

Buxton Company is currently operating at a loss of $15,000. The sales manager has received a special order for 5,000 units of product, which normally sells for $35 per unit. Costs associated with the product are: direct material, $6; direct labor $10; variable overhead, $3; applied fixed overhead, $4; and variable selling expenses, $2. The special order would allow the use of a slightly lower grade of direct material, thereby lowering the price per unit by $1.50 and selling expenses would be decreased by $1. If Buxton wants this special order to increase the total net income for the firm to $10,000, what sales price must be quoted for each of the 5,000 units? a) $23.50, b)$24.50, c)$27.50 or d)$34.00

Explanation / Answer

So answer is c) $27.50.

Particulars Amount Target Net Income        10,000 Add: Present Operating Loss        15,000 Net Operating Gain required from special Order        25,000 Add: Cost of Product Direct Material @ 4.5/unit        22,500 Direct Labour @ 10/unit        50,000 Variable Overheads @ 3/unit        15,000 Applied Overheads @ 2/unit        20,000 Variable Selling Expenses @ 1/unit           5,000 Total Recovery from Customer     1,37,500 Units of special order           5,000 Selling Price / unit           27.50

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