The following are the unit costs of making and selling an item at a volume of 30

Question

The following are the unit costs of making and selling an item at a volume of 30,000 units per month, which represents the company's capacity: Manufacturing Direct materials Direct labor Variable overhead Fixed overhead $ 5.10 11.10 1.10 3.10 Selling and administrative Variable Fixed 710 9.10 Assume the company has 300 units left over from last year which have small defects and which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. The variable selling and administrative costs would have to be incurred to sell the defective units. The cost that is relevant as a guide for setting a minimum price on these defective units is: (Round your answer to two decimal places.) $16.20 per unit. $27.50 per unit. $710 per unit. $32.40 per unit.

Explanation / Answer

For setting a minimum price for the defective units , we need to use relevant costing.

Under relevant costing all the past costs or sunk costs along with all committed or fixed cost are to be avoided.

The only cost which is relevant is the incremental cost or the cost which is required to effect the sales.

Accordingly, in the given question , all manufacturing costs are now sunk cost for those already produced defective units thus they are not be consider as cost for pricing & fixed selling & administrative cost are also to be avoided.

Thus , cost that is revelant for setting minimum price for defective units is variable selling & administrative cost = $7.10 per unit (ie option c)

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