Question

Toledo Manufacturing is contacted by a prospective customer who wants a one-time-only special order for a product similar to one that Toledo offeres to its regular customers. The following per unit data apply for sales to regular customers:

            Direct materials $2,545

            Direct labor 1,100

            Variable manufacturing support 1,400

            Fixed manufacturing support 3,200

                  Total manufacturing costs $8,245

            Markup (40%) 3,298

            Targeted selling price $11,543

Toledo Manufacturing has excess capacity.

Required:

a. Identify which costs are relevant to Toledo for making a decision about this one-time-only special order.

b.    For Toledo Manufacturing, what is the minimum acceptable price of this one-time-only special order?

Answer 1

One type of decision that affects output levels and is related to accept or reject special orders when there is idle production capacity. The special orders have no long-run implications.

a. Relevant cost is a managerial accounting term that describes avoidable costs that are incurred only when making specific business decisions. The concept of relevant cost is used to eliminate unnecessary data that could complicate the decision-making process.
Relevant costs are Direct Material, Direct Labor, and Variable Manufacturing Support.

b. Minimum Acceptable Price is $8,245, which is the total manufcaturing cost incurred.