Question

The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:
Direct Materials $18.00

Direct Labor $6.80

VMOH $2.40

Fixed MOH $11.60

Variable selling and admin. expense $1.90

Fixed selling and admin. expense $5.10
The normal selling price of the product is $51.10 per unit.
An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.10 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.

1. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $41.60 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

A. $2,000
B. $25,200
C. $(8,400)
D. $(18,800)

2. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

A. $5.40
B. $5.30
C. $9.50
D. $22.00

3. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 200 units for regular customers. The minimum acceptable price per unit for the special order is closest to:

A. $38.80
B. $31.20
C. $51.10
D. $45.80

Answer 1

1. Increase in net operating income = 2000 units * (Selling price - Variable Costs)

= 2000 (41.60 - 18-6.80-2.40-1.80) = 2000 units * 12.6 = $ 25,200 (Option B)

2. Oppurtunity Cost = Contribution forgone per unit = Selling price - Variable Cost

= 51.10 - (18 + 6.80 + 2.40 + 1.90) = 51.10 - 29.10 = $ 22 per unit (Option D)

3. Minimum acceptable price = Variable cost to be incurred now + Contribution forgone per unit

= (18+6.80+2.4+1.8) + 200*22/2000 = 29 + 2.2 = $ 31.2 per unit (Option B)