Question

Tarind Corporation manufactures shirts, and it is considering whether or not it should accept a special order for 12,000 shirts. The normal selling price of a shirt is $68 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 $5 per shirt and an additional direct labor cost of $3 per shirt. If it accepts this order, the company will have to rent special equipment to handle the shirt customization at a cost of $48,000. 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?

-25

-32

-21

-28

Answer 1

Relevant Cost for manufacturing 12,000 Shirts under special order:

	Amt in $
Direct materials	8
Additional Direct Material Cost	5
Direct labor	2
Addional Direct labor Cost	3
Variable Manufacturing overhead	3
Total Per Unit Cost	21
Cost for 12,000 Shirts	252000
Rent of Special Equipment	48000
Total Cost of Special Order	300000
Final cost per unit under special order	25

Tarind Corporation should charge minimum of $25 per shirt under the special order.