Question

Tarind Corporation manufactures shirts, and it is considering whether or not it should accept a special order for 9,000 shirts. The normal selling price of a shirt is $63 and its unit product cost is $20 as shown below:

Direct materials	$8.00
Direct labor	$2.00
Manufacturing overhead	$10.00
Unit product cost	$20.00

Most of the manufacturing overhead is fixed; however, 30% of it is variable with respect to the number of shirts produced. The special order will require customizing the shirts for the customer with an additional direct materials cost of $6 per shirt and an additional direct labor cost of $5 per shirt. If it accepts this order, the company will have to rent special equipment to handle the shirt customization at a cost of $54,000. The order would have no effect on the company's regular sales and it could be fulfilled using the company’s existing capacity without affecting any other order.

What is the minimum (i.e., the break-even) sales price per unit that the company should charge for this special order?

Multiple Choice

• $24

• $37

• $30

• $31

Answer 1

Direct Material (Including additional material cost of $6)	$14
Direct Labor (Including additinal labor cost of $5)	$7
Variable manufacturing overhead ($10*30%)	$3
Allocated cost of special equipment ($54,000 / 9,000 units)	$6
Cost per unit to the company (This can also be turned as minimum selling price)	$30

Thus the break even price is $30 and the same should be minimum sales price.

Note: Fixed manufacturing overhead is irrelevant cost for accepting a new order or not as they are to be incurred in any case. Hence, only variable cost is taken into account