Reference: 09-05
Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: $$\begin{array} { | l | c | }
\hline \text { Direct materials } & \$ 42.60 \
\hline \text { Direct labour } & 8.10 \
\hline \text { Variable manufacturing overhead } & 1.10 \
\hline \text { Fixed manufacturing overhead } & 17.30 \
\hline \text { Variable selling \& administrative expense } & 1.80 \
\hline \text { Fixed selling \& administrative expense } & 8.00 \
\hline
\end{array}$$ The normal selling price of the product is $86.10 per unit.
An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales. Direct labour is a variable cost in this company.
-Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?
A)$9.70.
B)$7.20.
C)$8.40.
D)$32.50.

Question

Reference: 09-05
Eley Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: $$\begin{array} { | l | c | } 
\hline \text { Direct materials } & \$ 42.60 \
\hline \text { Direct labour } & 8.10 \
\hline \text { Variable manufacturing overhead } & 1.10 \
\hline \text { Fixed manufacturing overhead } & 17.30 \
\hline \text { Variable selling \& administrative expense } & 1.80 \
\hline \text { Fixed selling \& administrative expense } & 8.00 \
\hline
\end{array}$$ The normal selling price of the product is $86.10 per unit.
An order has been received from an overseas customer for 2,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.20 less per unit on this order than on normal sales. Direct labour is a variable cost in this company.
-Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?
A)$9.70.
B)$7.20.
C)$8.40.
D)$32.50.

Quizplus · Accepted Answer

The opportunity cost of each unit delivered to the overseas customer includes the contribution margin that would be foregone by not selling the unit at the normal price. Since the company is operating at capacity, producing a unit for the overseas customer means not producing a unit for the regular market. The contribution margin per unit at the normal selling price is calculated as the selling price minus variable costs (direct materials, direct labor, variable manufacturing overhead, and variable selling & administrative expense). The fixed costs are not considered in the calculation of opportunity cost for this decision, as they do not change with the decision to accept or reject the special order.Normal selling price = $86.10Total variable costs per unit = Direct materials ($42.60) + Direct labor ($8.10) + Variable manufacturing overhead ($1.10) + Variable selling & administrative expense ($1.80) = $53.60Contribution margin per unit = Normal selling price - Total variable costs per unit = $86.10 - $53.60 = $32.50Therefore, the opportunity cost of each unit delivered to the overseas customer is $32.50, as this is the contribution margin that would be foregone by not selling the unit at the normal price.

Reference: 09-05 Eley Company Produces a Single Product The Normal Selling Price of the Product Is $86

Reference: 09-05
Eley Company Produces a Single Product The Normal Selling Price of the Product Is $86