A manufacturer operating with excess capacity has been asked to fill a special order at $9.25 per unit. The regular price is $10 per unit. No other use of the currently idle capacity can be found. The manufacturer's usual variable costs per unit are $4.50 for direct materials, $3.00 for direct labour, $1.00 for variable overhead, and $1.50 for sales commission. No sales commission would be paid on this special order. The average fixed overhead cost per unit is $0.25. Under the general decision rule, the minimum price per unit for this special order is:
A) $8.75
B) $8.50
C) $10.00
D) $7.50

Question

Quizplus · Accepted Answer

The minimum price should cover all variable costs except the sales commission, which is not applicable for this special order. Therefore, the minimum price is $4.50 (direct materials) + $3.00 (direct labour) + $1.00 (variable overhead) = $8.50. Fixed overhead is not considered as it is a sunk cost in this scenario.

A Manufacturer Operating with Excess Capacity Has Been Asked to Fill