Question

Landor Appliance Corporation makes and sells electric fans. Each fan regularly sells for $40. The following cost data per fan is based on a full capacity of 88,000 fans produced each period.

Direct materials	$	10
Direct labor	$	8
Manufacturing overhead (25% variable and 75% unavoidable fixed)	$	8

A special order has been received by Landor for a sale of 20,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be $6 per fan for shipping. Landor is now selling 63,000 fans through regular channels each period. Assume that direct labor is an avoidable cost in this decision. What should Landor use as a minimum selling price per fan in negotiating a price for this special order?

Multiple Choice

• $26 per fan

• $20 per fan

• $28 per fan

• $28 per fan

Answer 1

Ans;

As separate capacity is available only Variable cost per units and costs relevant for special order are to be considered:

Variable cost per unit :

Direct Material : $10

Direct Labor : $8

Variable Manufacturing overhead : 25% * $8 = $2

Selling shipping costs: $6

Minimum cost per Unit : $10 + $8 + $2 + $6 = $26

So correct answer is option A.

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