A company currently is using its full capacity of 25,000 machine hours to manufacture
product XR-2000. A customer placed an order for the manufacture of 1,000 units of
KT-6500. The customer would normally manufacture this component. However, due to
a fire at its plant, the customer 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.
| KT-6500 |
XR-2000 |
| Material |
$27 |
$24 |
|
| Direct labor |
12 |
10 |
| Variable overhead |
6 |
5 |
| Fixed overhead |
48 |
40 |
| Variable selling & administrative |
5 |
4 |
| Fixed selling & administrative |
12 |
10 |
| Normal selling price |
$125 |
$105 |
| Machine hours required |
3 |
4 |
What is the minimum unit price that the company should charge the customer to
manufacture 1,000 units of KT-6500? |
| A. |
$93.00 |
| B. |
$125.00 |
| C. |
$110.00 |
| D. |
$96.50 |
|
the answer d
the details answer
The company would have to give up 3,000 machine hours to fill the customer's special order
for KT-6500 (1,000 units × 3 hours per unit). If the company devotes those hours to the
special order, it would give up 750 units of XR-2000 (3,000 hours ÷ 4 units per hour). The
per-unit cost of XR-2000 is $43 ($24 + $10 + $5 + $4), so the per-unit margin is $62 ($105 –
$43). The margin that the firm would forgo if it accepts the order is therefore $46,500 (750
units × $62 margin per unit). Dividing the $46,500 of lost profits on the existing product by the
1,000 units of the special order produces an opportunity cost of $46.50 per unit. Adding this
to the $50 of variable cost ($27 + $12 + $6 + $5) produces a minimum price of $96.50 |
why here although the factory operating with full capacity not take the the fixed costs as relevant costs
because when we have idle capacity we treat the fixed cost as irrelevant cost
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Sameh Mahmoud Ismail
Accountant
Giza
Egypt
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