Eley Corporation produces a single product. The cost of producing and selling a

Question

Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 47,000 units per month is as follows: Direct materials $46.10 Direct labor $8.80 Variable manufacturing overhead $1.80 Fixed manufacturing overhead $18.70 Variable selling & administrative expense $3.20 Fixed selling & administrative expense $15 The normal selling price of the product is $100.10 per unit. An order has been received from an overseas customer for 2,700 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 $1.90 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. 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?

Explanation / Answer

Opportunity cost of each unit delieverd to the overseas customers is the Contribution margin per unit lost on the normal sales.

Sales $100.10

Less: Variable cost

Direct materials $46.10

Direct Labour $8.8

Variable manufacturing overhead $1.8

Variable selling and administrative expenses $3.2

Total variable Cost $59.9

Contribution margin $40.2

Opportunity cost of each unit delievered to overseas customers = $40.2

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