A company produces 2000 units of a product with regular selling price of $50 per
ID: 2576394 • Letter: A
Question
A company produces 2000 units of a product with regular selling price of $50 per unit. The costs incurred by the company for producing a unit are: Direct material $15, direct labor $10, Variable manufacturing overheads $7 and fixed manufacturing overhead $7. The company has a capacity to produce 3000 units. What should be the minimum price per unit the company should charge for special order of above 1000 units?
Select one:
a. Cannot be determined
b. $32
c. $24
d. $25
e. $39
X and Y are the two production departments with distributed production overhead of $12000 and $6000 respectively. Dept. X consumes a total of 5000 labor hours while as dept. Y Consumes 4000 labor hours. Assuming labor hours as allocation base, the overhead rate for dept. X is
Select one:
a. $2.00
b. $1.50
c. Cannot be determined
d. $3.00
e. $2.40
Explanation / Answer
1. The company is currently producing 2,000 units however it has the capacity of producing 3,000 units. The capacity is not being used for remaining 1,000 units. If the company receives the special order which is over and above of the current production, no fixed cost will be incurred because Fixed costs do not vary with the production units.
Therefore the total cost which will be incurred for special order will :
Direct Material 15
Direct Labour 10
Variable Mfg Overheads 7
Total V.cost 32
Nothing will be incurred over and above $32 for the special order. Therefore the minimum price the company may charge is $32 per unit ( At no profit no loss). Hence the Answer is "b".
2. - Answer is "e"
Production Overheads for Dept X $12,000
Labour Hours (allocation base) 5,000 hrs
Overhead rate ( Total overheads/Labour hours) $ 2.4/hr (12,000/5,000)
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