Question

Coat Co. sells product P at a price of $38 a unit. The per-unit cost data are: direct materials $8, direct labor $10, and overhead $12 (25% fixed and 75% variable). Coat has sufficient capacity to accept a special order for 40,000 units just received. Variable selling costs associated with this order would be $3 per unit.

1) Minimum selling price?

2) At a selling price of $33 per unit, operating income will increase or decrease by how much?

Answer 1

Part (1) - Minimum Selling price for the special order:

Direct Materials = $ 8.00 / unit

Direct Labour = $ 10.00 / unit

Variable Overhead = $ 9.00 / unit  

( $ 12.00 * 75% )

Variable Selling Cost = $ 3.00 / unit

Minimum Selling Price = $ 32.00 / unit.

( Fixed Overheads are not considered for the special order since they are same even if the order is accepted or not)

Part (2) - Change in Operating Income when selling price is $ 33.00 / unit:

Selling Price = $ 33.00 / unit

Additional cost per unit = $ 32.00 / unit

Profit per unit = $ 1.00 / unit

Additional Units Produced = 40,000 units

Increase in Operating Income = 40,000 * $ 1.00 / unit = $ 40,000