Question

Shelby Industries has a capacity to produce 45,000 oak shelves per year and is currently selling 40,000 shelves for $32 each. Martin Hardwoods has approached Shelby about buying 1,300 shelves for a new project and is willing to pay $25 each. The shelves can be packaged in bulk; this saves Shelby $1.40 per shelf compared to the normal packaging cost. Shelves have a unit variable cost of $26 with fixed costs of $350,000. Because the shelves don’t require packaging, the unit variable costs for the special order will drop from $26 per shelf to $24.60 per shelf. Shelby has enough idle capacity to accept the contract. What is the minimum price per shelf that Shelby should accept for this special order?

--------- $ per shelf

Answer 1

First, Let's understand the question

Shelby Industries has capacity to produce 45,000 oak shelves per year.

But they are Currently selling only 40,000 shelves

That Means They have excess and unutilised capacity of 5000 shelves

Now they receive a special order of 1300 shelves

But for the specail order, They donot have to pack each shelf individually instead they can pack it in bulk

Due to package in bulk they will save $1.40 per shelf.

So Now Variable Cost for the special order is $24.60 per shelf i.e., ($26.00 - $1.40) per shelf.

As Shelby Industries has excess capacity for 5,000 shelves, There is no additional fixed cost because of special order of 1300 units.

So Shelby Industries should charge atleast variable cost from the Martin Hardwoods.

Therefore, Minimum Price per shelf that shelby should accept this order is $24.60 per shelf.