Happy Tea Company’s regular selling price for a case of its product is $6. Variable costs are $4 per case. Fixed costs total $1 per case based on 100,000 cases, and remain unchanged within the relevant range of 50,000 cases to total capacity of 200,000 cases. After sales of 80,000 cases were projected for the year, a special order was received for an additional 10,000 cases. What is the minimum selling price for the special order?
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Happy Tea Company’s regular selling price for a case of its product is $6. Variable costs are $4 per case. Fixed costs total $1 per case based on 100,000 cases, and remain unchanged within the relevant range of 50,000 cases to total capacity of 200,000 cases. After sales of 80,000 cases were projected for the year, a special order was received for an additional 10,000 cases.
What is the minimum selling price for the special order?
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