#20 Eley Corporation produces a single product. The cost of producing and sellin

Question

#20

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 54,000 units per month is as follows:

An order has been received from an overseas customer for 3,400 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 $2.60 less per unit on this order than on normal sales.

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?

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 54,000 units per month is as follows:

Explanation / Answer

Solution:

If the company is already operating at capacity then Opportunity cost of each unit delivered to overseas customers would be the Contribution margin lost on normal sales per unit.

Contribution margin per unit on normal sales = selling price - all variable cost per unit

= $114.10 - ($49.60 + $9.50 + $2.50 - $4.60) = $47.90

Hence Opportunity cost of each unit delivered to overseas customers = $47.90 per unit

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