J The Venane Cmy males single prductclled a Hom. The company has the capacity to
ID: 2599847 • Letter: J
Question
J The Venane Cmy males single prductclled a Hom. The company has the capacity to praduce 43,00 homs per year. Per unit costs to produce and sell one Hom at that activity level are: $20 Direct materials Direct laber Tariable manufacturing overhead Fised manofacturing onerhcad. Variable selling espens Fised selling expee... $10 $5 $7 $8 $2 The regular selling price for one Hom is $60. A special order has been received from the Fairview Compuny to purchase 8,000 Hems next year. For this special order, the variable selling expense would a specialized machine to engrave the be reduced by1 Fairview name on each Hom in the special order. This machine would cost S12,000 and it would have no use after the special ordet was filled. If Varone can expect to sell 34,000 Homs next year through regular channels, at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order? (Choose the closest answer) A. $51.20 B. $49.70 C.$42.20 D. $42.50 E.$43.70 4. Last year a company had sales of $500,000, a capital turnover of 2.4, and a return on invest 36%. The company's net operating income for the year was (choose the closest answer): A. $75,000 B. $180,000 C. $80,000 D. $60,000 E. $208,333Explanation / Answer
3.
Company V's full capacity is 43,000 units. However, it is producing and selling only 34,000 units through regular channel. Excess capacity is available with Company V for 9,000 units. Therefore, if the special order of 8,000 units is accepted by Company V, there would be no effect of its fixed costs.
Thus, the cost of producing one unit for the special order will include only the variable costs and the cost of the specialized machine per unit.
Cost of one unit for special order
= Direct materials + Direct labor + Variable manufacturing overhead + Variable selling expense + Cost of specialized machine per unit
= $20 + $10 + $5 + ($8 x 90%) + ($12,000/8,000 units)
= $43.70
The cost of producing one unit for the special order is $43.70. Therefore, if the special order price is equal to $43.70, Company V would neither earn any profit nor incurr any loss by accepting the special order.
Thus, when the special order price is $43.70, Company V would be indifferent between accepting or not accepting the special order.
The correct answer is E.
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