Question

The following are Silver Corporation's unit costs of making and selling an item at a volume of 8,700 units per month (which represents the company's capacity): Manufacturing: Direct materials $ 2.60 Direct labor $ 3.60 Variable overhead $ 2.10 Fixed overhead $ 0.65 Selling and administrative: Variable $ 3.60 Fixed $ 1.05 Present sales amount to 6,100 units per month. An order has been received from a customer in a foreign market for 2,600 units. The order would not affect regular sales. Total fixed costs, both manufacturing and selling and administrative, would not be affected by this order. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume that direct labor is a variable cost. Assume the company has 80 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company's other sales. Which of the following costs is relevant in this decision? Multiple Choice $8.95 unit product cost $8.30 variable manufacturing cost $3.60 variable selling and administrative cost $13.60 full cost

Answer 1

Ans:

$3.6 variable selling and administrative cost

Explanation:

Variable selling and administrative cost is relevant for selling those defective units;

Because variable manufacturing is already incurred during the production and fixed cost are same for all level of sales.

These are sunk cost not Relevant for decision making

So $3.6 variable selling and administrative cost is relevant, why because these are need to be incurred for selling the defective units.