Question

The following data pertains to Takeya, a cap manufacturer.

Capacity	1,800,000
Current production and sells	1,500,000
Unit price	$0.40
Unit variable costs
Manufacturing	$0.20
S&A	$0.10
Total fixed costs
Manufacturing	$51,000
S&A	$24,000

A bottle producer, BottleIt has contacted Takeya about purchasing 150,000 units at $0.35 each. In addition, another customer, Beer Incorporated, wants 300,000 units (all or nothing). Takeya cannot accept both orders. For the Beer Inc. only 50% of the variable selling and administrative costs would be incurred. What is Takeya's minimum price for Beer Inc.?

A. $0.275

B. $0.454

C. $0.10

D. $0.152

E. None of the above

With work please so I can learn

Answer 1

Ans:

Minimum price for Beer INC.: Relevant Variable cost + Opportunity cost

Relevant Variable cost = Variable manufacturing cost + 50% of Variable S&E cost

= 50% * ($0.20 + $0.05)

= $0.25

Opportunity cost : Income forgone on special order from Bottlet:

Order Value : $0.35 per bottle

Variable costs : $0.20 + $0.10 = $0.30 per bottle

Profit per Bottle : $0.35 - $0.30 = $0.05

Number of Bottles in Order : 150,000

Total profit forgone : 150,000 * $0.05 = $7,500

Opportunity cost per bottle of Beer Inc. to be added to order minimum Value :

Total Order size : 300,000

Opportunity Cost per bottle = $7,500 / 300,000 = $0.025

Minimum cost per Unit = $0.25 + $0.025 = $0.275

So correct answer is option A.

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