Amber Grease Manufacturing produces a single product. The cost of producing and

Question

Amber Grease Manufacturing produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:

Direct materials............................................................

$38.80

Direct labor (variable cost)...................................

$9.70

Variable manufacturing overhead...................

$2.30

Fixed manufacturing overhead..........................

$18.10

Variable selling & administrative expense..

$1.70

Fixed selling & administrative expense.........

$8.80

Normal selling price per unit

$85.10

An order has been received from an overseas customer for 3,000 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 $0.20 less per unit on this order than on normal sales.

Required:

Suppose the company has ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $75.30 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the minimum acceptable price per unit for the special order?

Suppose the company does not have enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,000 units for regular customers. What would be the minimum acceptable price per unit for the special order?

What are some of the issues other than capacity that Amber Grease should consider in determining the price per unit for the special order? Discuss at least 2 issues in detail.

Direct materials............................................................

$38.80

Direct labor (variable cost)...................................

$9.70

Variable manufacturing overhead...................

$2.30

Fixed manufacturing overhead..........................

$18.10

Variable selling & administrative expense..

$1.70

Fixed selling & administrative expense.........

$8.80

Normal selling price per unit

$85.10

Explanation / Answer

a. Variable cost per unit on normal sales: Direct materials $            38.80 Direct labor $               9.70 Variable manufacturing overhead $               2.30 Variable selling & administrative expense $               1.70 Variable cost per unit on normal sales $            52.50 Variable cost per unit on special order: Normal variable cost per unit $            52.50 Reduction in variable selling & admin.      0.20 Variable cost per unit on special order $            52.30 Selling price for special order $            75.30 Variable cost per unit on special order $            52.30 Unit contribution margin on special order $            23.00 Number of units in special order 3000 Increase (decrease) in net operating income $          69,000 b. Variable cost per unit on special order $            52.30 $ 156,900.00 Loss of contribution on regular customer 32.6 $    97,800.00 (85.1-52.5)*3000 Total cost of accepting order $            84.90 $ 254,700.00 The minimum acceptable price per unit for the special order should be $84.9. c. Unit contribution margin on normal sales (85.1-52.5) $            32.60 Displaced normal sales 1000 Lost contribution margin displaced sales $    32,600.00 Total variable cost on special order $ 156,900.00 $ 189,500.00 Number of units in special order 3000 Minimum acceptable price on special order $            63.17

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