Question

A company manufactures bird feeders, which they normally sell for $30 each. The company compiles the following information relating to the production of the bird feeders.

Plant capacity 280,000 feeders
Current production level 200,000 feeders
Direct materials $9 per unit
Hourly Labor $6 per unit
Variable overhead $3 per unit
Fixed overhead $400,000

The company receives a request from a large buyer to purchase 12,000 feeders at a reduced price.

What is the minimum price per unit that the company should charge for this order?

A. 9

B. 15

C. 18

D. 20

Answer 1

Answer: Option C. 18

Computation of minimum price per unit the company should charge for this order is as follows:

Company should charge minimum price as cost per unit to the company. In simple term, company should charge minimum price at which company has neither have profit or loss.

Fixed cost is same irrespective of production, this fixed cost will not incur if company produce extra units within the total capacity.

Cost per unit to the company is variable cost per unit.

Variable cost per unit = Direct materials per unit + Direct labor per unit + Variable overhead per unit

= $ 9 + $ 6 + $ 3

= $ 18

Thus, Variable cost per unit is $ 18 which company should charge a minimum price per unit for this order.