Question

GEM Limited has a single product Flicks. The company normally produces and sells 80,000 units of Flicks each year at a price of $240 per unit. The company’s unit costs at this level of activity are as follow: Direct material $57.00 Direct labour 60.00 Variable manufacturing overhead 16.80 Fixed manufacturing overhead 30.00 Variable selling and administrative costs 10.20 Fixed selling and administrative costs 27.00 Total unit cost $201.00 GEM has sufficient capacity to produce 100 000 units of Flicks a year without any increase in fixed manufacturing overhead. Required: (a) GEM has an opportunity to sell 10 000 units to an overseas customer. Import duties and other special costs associated with this order would total $42 000. The only selling costs that would be associated with the order would be a shipping cost of $9.00 per unit. What would be the minimum acceptable unit price for GEM to consider this order? (hint: GEM would not accept the order if it would reduce the company’s profit) (b) The company has 200 units of Flicks on hand that were produced two months ago. Due to blemishes on the units, it will be impossible to sell these units at the normal price. If the company wishes to sell them through regular sales channels, what would be the relevant cost for setting the minimum price? Explain. (c) “All future costs are relevant in decision making.” Do you agree? Explain.

Answer 1

Answers:

A.)

.

B.

Only Variable selling expense is relevant for setting a minimum selling price. Here as the units are seconded so all product costs are sunk. The fixed selling expense are not relevant because they will not change regardless the irregular units are sold or not.

So relevant variable selling expense of $ 10.20 is the relevant minimum selling price.

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C.

The statement "All future costs are relevant in the decision making" is incorrect because only those future costs that differ between the alternatives are relevant.