Question

Glade Company produces a single product. The costs of producing and selling a single unit of this product at the company's current activity level of 8,000 units per month are:

Direct Materials ……………………………………………........................ $2.50

Direct labor ……………………………………………………...………… $3.00

Variable manufacturing overhead ……………………………..………….. .$0.50

Fixed Manufacturing Overhead …………………………...……………….. $4.25

Variable selling and administrative expenses………………………………. $1.50

Fixed selling and administrative expenses………………………………….. $2.00

The normal selling price is $15 per unit. The company's capacity is 10,000 units per month. An order has been received from a potential customer overseas for 2,000 units at a price of $12.00 per unit. This order would not affect regular sales.

Required:

1. If the order is accepted, by how much will monthly profits increase or decrease? (The order would not change the company's total fixed costs.)
2. Assumethecompanyhas500unitsofthisproductleftoverfromlastyearthat are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? Explain.

Answer 1

Answer :

(a) Computation of Increase or Decrease of monthly profit if Order is Accepted

	2000 unit
Revenue ( 2000* $ 12 )	$ 24000
Total Revenue (a)	$ 24000
Relevant cost
Direct Material ( $ 2.50* 2000)	$ 5000
Direct Labor ( $ 3*2000)	$ 6000
Variable manufacturing overhead ( $ 0.50 * 2000)	$ 1000
Variable selling and administrative expenses ( $ 1.50*2000)	$ 3000
Total cost (b)	$ 15000
Increase of monthly profit if Order is Accepted (a) - (b)	$ 9000

(b) 500 unit of product is manufactured in last year so all Manufacturing cost related to that product is already incurred , unavoidable and not relevant for decision making.

Only relevant cost for establishing a minimum selling price for these units is Future cost ...ie variable selling and administrative expenses $ 1.50 per unit.

so relevant cost is $ 1.50 per unit .