Question

Alton Inc. is working at full production capacity producing 39,000 units of a unique product. Manufacturing costs per unit for the product are as follows: Direct materials $ 10 Direct labor 9 Manufacturing overhead 11 Total manufacturing cost per unit $ 30 The per-unit manufacturing overhead cost is based on a $5 variable cost per unit and $234,000 fixed costs. The nonmanufacturing costs, all variable, are $10 per unit, and the sales price is $67 per unit. Sports Headquarters Company (SHC) has asked Alton to produce 6,600 units of a modification of the new product. This modification would require the same manufacturing processes. However, because of the nature of the proposed sale, the estimated nonmanufacturing costs per unit are only $5 (not $10). Alton would sell the modified product to SHC for $52 per unit.

Suppose that Alton Inc. had been working at less than full capacity to produce 33,100 units of the product when SHC made the offer. What is the minimum price per unit that Alton should accept for the modified product under these conditions?

Answer 1

Computation of Minimum Selling Price
Particuler	Amount	Amount
Variable Cost
Direct Material	$10.00
Direct Labour	$9.00
Variable Factory Overhead	$5.00
Variable Non- anufacturing Cost	$5.00
Total Variable cost		$29.00
Opportunity Cost
Contribution per Unit from Rgular Sales (67-10-9-5-10)	$33.00
No. of Unit lost (6600+33100-39000)	700.00
Total Opportunity cost (33*700)	$23,100.00
Mark up for opportunit Cost (23100/700)		$33.00
Minimum Selling Price		$62.00
Computation of Minimum Selling Price
Particuler	Amount	Amount
Variable Cost
Direct Material	$10.00
Direct Labour	$9.00
Variable Factory Overhead	$5.00
Variable Non- anufacturing Cost	$5.00
Total Variable cost		$29.00
Opportunity Cost
Contribution per Unit from Rgular Sales (67-10-9-5-10)	$33.00
No. of Unit lost (6600+33100-39000)	700.00
Total Opportunity cost (33*700)	$23,100.00
Mark up for opportunit Cost (23100/700)		$33.00
Minimum Selling Price		$62.00