A manufacturer operating with excess capacity has been asked to fill a special order at $7.25 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 $3.50 for direct materials, $2.00 for direct labour, $1.00 for variable overhead, and $0.50 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) $7.25
B) $6.50
C) $7.00
D) $7.50

Question

Quizplus · Accepted Answer

The general decision rule states that a company should accept a special order only if the revenue from the order is greater than the additional variable costs plus the opportunity cost of the resources used.

In this case, the additional variable costs per unit for the special order are:
Direct materials: $3.50
Direct labor: $2.00
Variable overhead: $1.00
No sales commission: $0.00
Total additional variable cost per unit: $6.50

The opportunity cost of the resources used is the contribution margin per unit that could be earned from the next best alternative use of the idle capacity. Since no other use of the idle capacity can be found, the opportunity cost is $0.

Therefore, the minimum price per unit for this special order is the additional variable costs per unit, which is $6.50. The special order price of $7.25 per unit is greater than the minimum price per unit, so the manufacturer should accept the special order.

A Manufacturer Operating with Excess Capacity Has Been Asked to Fill