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2C Decision Analysis: Special order at absence of available capacity

  • 1.  2C Decision Analysis: Special order at absence of available capacity

    Posted 09-10-2020 03:09 AM
    Hello mates,
    I don't understand the answer for this practice question. Gardener is using its full capacity. It means Gardener is at absence of available capacity

    Thus Variable cost, Fixed cost and Revenue is considered in bid price at this case. However, the answer does not include fixed cost

    Gardener Company currently is using its full capacity of 25,000 machine hours to manufacture product XR-2000. LJB Corporation placed an order with Gardener for the manufacture of 1,000 units of KT-6500. LJB would normally manufacture this component. However, due to a fire at its plant, LJB needs to purchase these units to continue manufacturing other products. This is a one time special order. The following reflects unit cost data, and selling prices.
    image.png
    What is the minimum unit price that Gardener should charge LJB to manufacture 1,000 units of KT-6500?
    a. $93.00.
    b. $96.50.
    c. $110.00.
    d. $125.00
    Answer:  Correct answer b. The minimum price that Gardner should charge for the special order is $96.50 per unit. This price covers the variable cost of KT-6500 plus the forgone contribution from Product XR-2000 as shown below.
    Hours required for 1,000 units of KT-6500 3,000 hours
    Units of XR-2000 not produced: 3,000 hours ÷ 4 750 units
    XR-2000 contribution: $105 - $24 - $10 - $5 - $4 $62 per unit
    KT-6500 bid price: = [(750 x $62) ÷ 1m000] + $27 +12 +$6 + $5 = $46.50 + $27 + $12 + $6 + $5 = $96.50

    Thanks in advance