The following information relates to a product produced by Creamer Company: Fixed selling costs are $500,000 per year,and variable selling costs are $12 per unit sold.Although production capacity is 600,000 units per year,the company expects to produce only 400,000 units next year.The product normally sells for $120 each.A customer has offered to buy 60,000 units for $90 each.
The incremental cost per unit associated with the special order is
A)$84.
B)$81.
C)$69.
D)$64.

Question

The following information relates to a product produced by Creamer Company:  Fixed selling costs are $500,000 per year,and variable selling costs are $12 per unit sold.Although production capacity is 600,000 units per year,the company expects to produce only 400,000 units next year.The product normally sells for $120 each.A customer has offered to buy 60,000 units for $90 each.
The incremental cost per unit associated with the special order is
A)$84. 
B)$81. 
C)$69. 
D)$64.

Quizplus · Accepted Answer

To calculate the incremental cost per unit associated with the special order, we need to identify the additional costs that would be incurred if the order is accepted.

The variable cost per unit is already given as $12.

There are no additional fixed costs since the company has already budgeted for $500,000 in fixed selling costs per year.

However, there is an opportunity cost associated with accepting the special order. Since the product normally sells for $120 each, the company would be forgoing $30 per unit by accepting the special order at $90 each.

Therefore, the incremental cost per unit associated with the special order is:

Variable cost per unit + Opportunity cost per unit 
= $12 + $30 
= $42

Hence, the best choice is to reject the special order since the incremental cost per unit associated with the order is higher than the offered price.

The Following Information Relates to a Product Produced by Creamer