Question

Sheldon Shoes Company makes and sells a variety of leather shoes for children. For its current mix of different models and sizes, the average selling price and costs per pair of shoes are as follows:

(Click the icon to view the data.) Shoes are manufactured in batch sizes of 100 pairs. Each batch requires 4 machine hours to manufacture. The plant has a total capacity of 5000, machine hours per month, but current monthly production consumes only about 90%of the capacity. A discount store has approached Sheldon to buy 8,000 pairs of shoes next month. It has requested that the shoes bear its own private label. Embossing the private label will cost Sheldon an additional $ 0.30 per pair. However, no variable selling costs will be incurred for fulfilling this special order.

Requirement

Determine the minimum (floor) price that Sheldon Shoes should charge for this order. What other considerations are relevant to this decision?

First, select the labels then calculate the minimum (floor) price that Sheldon should charge for the new order

Data:

ITEM		AMOUNT
Price		$26
Costs:
	Direct materials	$4
	Direct labor	8
	Variable manufacturing overhead	1
	Variable selling costs	4
	Fixed overhead	1
Total costs		$18

Answer 1

Total relevant cost per pair of the special order = Direct Materials + Direct Labor + Variable Manufacturing Overhead + Cost of Embossing = $ ( 4 + 8 + 1 + 0.30) = $ 13.30.

Therefore, the minimum price to be charged is $ 13.30 per pair of shoes.

Fixed overhead is not relevant, as it is assumed to remain unchanged regardless of acceptance or otherwise of the order from the discount store.

Number of machine hours required for the order = 8,000 / 100 * 4 = 320.

Spare capacity of the plant before acceptance of the special order = 5,000 x 10 % = 500 machine hours.

Therefore, taking on the order would not lead to a loss of regular sales for Sheldon Shoe Company. Also, the order from the discount store would result in better capacity utilization and recovery of fixed overheads.