A company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 106,800 units per year is: Direct materials $ 1.70 Direct labor $ 3.00 Variable manufacturing overhead $ 0.80 Fixed manufacturing overhead $ 4.95 Variable selling and administrative expenses $ 1.60 Fixed selling and administrative expenses $ 2.00 The normal selling price is $23.00 per unit. The company’s capacity is 133,200 units per year. An order has been received from a mail-order house for 2,200 units at a special price of $20.00 per unit. This order would not affect regular sales or total fixed costs. Required: What is the financial advantage (disadvantage) of accepting the special order? As a separate matter from the special order, assume the company’s inventory includes 1,000 units that are inferior quality. The units must be sold through regular channels at a reduced price. The company does not expect the selling of these inferior units to affect regular sales. What unit cost is relevant for establishing a minimum selling price for the inferior units?
A company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 106,800 units per year is: Direct materials $ 1.70 Direct labor $ 3.00 Variable manufacturing overhead $ 0.80 Fixed manufacturing overhead $ 4.95 Variable selling and administrative expenses $ 1.60 Fixed selling and administrative expenses $ 2.00 The normal selling price is $23.00 per unit. The company’s capacity is 133,200 units per year. An order has been received from a mail-order house for 2,200 units at a special price of $20.00 per unit. This order would not affect regular sales or total fixed costs. Required: What is the financial advantage (disadvantage) of accepting the special order? As a separate matter from the special order, assume the company’s inventory includes 1,000 units that are inferior quality. The units must be sold through regular channels at a reduced price. The company does not expect the selling of these inferior units to affect regular sales. What unit cost is relevant for establishing a minimum selling price for the inferior units?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
A company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 106,800 units per year is:
| Direct materials | $ 1.70 |
|---|---|
| Direct labor | $ 3.00 |
| Variable manufacturing |
$ 0.80 |
| Fixed manufacturing overhead | $ 4.95 |
| Variable selling and administrative expenses | $ 1.60 |
| Fixed selling and administrative expenses | $ 2.00 |
The normal selling price is $23.00 per unit. The company’s capacity is 133,200 units per year. An order has been received from a mail-order house for 2,200 units at a special price of $20.00 per unit. This order would not affect regular sales or total fixed costs.
Required:
- What is the financial advantage (disadvantage) of accepting the special order?
- As a separate matter from the special order, assume the company’s inventory includes 1,000 units that are inferior quality. The units must be sold through regular channels at a reduced price. The company does not expect the selling of these inferior units to affect regular sales. What unit cost is relevant for establishing a minimum selling price for the inferior units?
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