Question

The following are Silver Corporation's unit costs of making and selling an item at a volume of 9,400 units per month (which represents the company's capacity): Manufacturing: Direct materials $ 2.10 Direct labor $ 3.10 Variable overhead $ 1.60 Fixed overhead $ 0.40 Selling and administrative: Variable $ 3.10 Fixed $ 0.80 Present sales amount to 7,300 units per month. An order has been received from a customer in a foreign market for 2,100 units. The order would not affect regular sales. Total fixed costs, both manufacturing and selling and administrative, would not be affected by this order. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume that direct labor is a variable cost. Assume the company has 55 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company's other sales. Which of the following costs is relevant in this decision? Multiple Choice $6.80 variable manufacturing cost $7.20 unit product cost $3.10 variable selling and administrative cost $11.10 full cost

Answer 1

The relevant cost for foreign market

The best answer to this question should be 9.90 Variable cost. Kindly check ............... this $ 9.90 is there in choice given in the question. Otherwise, next best solution should be as under

Direct material	2.1
Direct labor	3.1
Variable overhead	1.6
Selling and admin	3.1
Total Variable cost	9.9
Fixed manufacturing	0.4
Fixed selling and admin	0.8
Full cost	11.1

Fixed costs, both manufacturing and selling and admin were computed using the full capacity of 9400 units. But we are selling only 7300 in the home market, so remaining to be recovered from 2100 units. So on that basis inclusion of fixed costs and considering the full cost is justifiable in this case.

Kindly comment, if there is any further trouble in this question.