Question

Carlos Company has just obtained a request for a special order of 8,000 jigs to be shipped at the end of the month at a selling price of $9 each. The company has a production capacity of 90,000 jigs per month. At present, the company is producing and selling 85,000 jigs per month through regular channels at a selling price of $12 each. For these regular sales, the cost for one jig is:

           

            Variable production costs        $4.60

            Fixed production costs            1.70

            Variable selling expenses        1.40

Variable production costs and variable selling costs will remain the same on the special order units. There will be no change to total fixed costs. What would the selling price of the special order need to be in order for Carlos Company to be economically indifferent between accepting and rejecting the special order?

Answer 1

Computing total fixed cost:

Fixed cost = $1.70 * 85,000

                    = $144,500.

Fixed cost per unit on production of 93,000 jigs.

Fixed cost per unit = $144,500 / 93,000

                  = $1.55

Selling price at which economically indifferent between accepting and rejecting order:

Details	Per unit cost
Fixed cost per unit	$                1.55
Variable production cost	$                4.60
Variable selling expenses	$                1.40
Special order selling price	$                7.55

At the above selling price of $7.55, company will not get any profit on additional units sold as the above price is just total cost per unit without adding profit.