Spotless, Inc. produces and sells a single product called Dustless. The firm has

Question

Spotless, Inc. produces and sells a single product called Dustless. The firm has production capacity of 100,000 machine hours. One bottle of Dustless is produced in one machine hour. The company expects annual deman d to remain at 80,000 bottles of Dustless. Each bottle sells for $10. Costs for producing and selling 80,000 bottles of Dustless are as follows: Variable Costs Per Unit: Direct Materials $1.50 Direct Labor $2.50 MOH (V) $0.80 Selling expense (V) $2.00 Fixed Costs Per Unit: MOH (F) $1.25 Selling/administrative (F) $0.65 Total Cost Per Unit $8.70 Required. a. Spotless, Inc. has 2,000 bottles of Dustless that were partially damaged in storage. It can sell these units through discount ch annels at reduced prices, incurring an incremental variable selling cost of $0.20. Otherwise, Spotless, Inc. can dispose of the damaged bottles (i.e., scrap them). Selling damaged units through the discount channel will not affect regular sales of the pr oduct. What is the relevant per unit cost to determine the minimum selling price for the damaged bottles? b. Spotless, Inc. receives a one - time special order for 5,000 bottles of Dustless. Accepting the order will not affect regular sales of 80,000 bottles. Variable selling costs for the special order are $1.00 per bottle. What is the total incremental cost to Spotless, Inc. from accepting this special order? c. What price must Spotless, Inc. charge on the 5,000 special order bottles in part (b) in order to g enerate a contribution margin ratio of 40% on those units?

Explanation / Answer

Damaged bottles Direct Material              1.50 Direct labor              2.50 Manufacturing overhead              0.80 Selling overhead              2.00 Additional selling overhead              0.20 Total Relevant cost per unit for damaged stock              7.00 Part B Direct Material              1.50 Direct labor              2.50 Manufacturing overhead              0.80 Selling Cost              1.00 Per unit increamental cost              5.80 Units      5,000.00 Total increamental cost- 5000*5.80    29,000.00 Part B Cost    29,000.00 Contribution margin 40% Cost as percentage of selling price 60% Selling price =29000/60% Selling price    48,333.33

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