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:

(a)

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? (3 points)

(c)

(d)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. (3 points) -- Only looking for answer to d)

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

Direct materials

38.80

Direct manufacturing labour

9.70

Variable manufacturing overhead cost

2.30

Variable selling and administrative cost

Less: expense for special order

1.70

(0.20)

52.30

Minimum acceptable price for special order is $52.30

(d)

(1.) Repayment :

Order price will be affected by terms of sale. If credit period given is more than normal credit period given in normal sales, then company may require to increase its sales price to bear the expense of interest and other cost of blocked funds. On the other hand, if sale is made on immediate cash payment, company may give discount for prompt payment thereby affecting sales price.

(2.) Regulations for overseas sale:

Sales price could also be affected by regulations laid by local government for overseas sale. It may incur extra taxes like customs for overseas sales. In that case, company may require to increase sales price to the extent of taxes laid

1. Calculation of total variable cost per unit

Direct materials

38.80

Direct manufacturing labour

9.70

Variable manufacturing overhead cost

2.30

Variable selling and administrative cost

Less: expense for special order

1.70

(0.20)

52.30

Minimum acceptable price for special order is $52.30

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