Blue Chip Company sells gears for $9 per unit.The unit cost of each gear follows: $$\begin{array} { l r }
\text { Direct materials } & \$ 1.50 \
\text { Direct labor } & 2.20 \
\text { Manufacturing overhead } & 2.10 \
\text { Total } & \$ 5.80
\end{array}$$ An order to purchase 4,000 gears was recently received from a new customer.There is enough capacity to fill the order and filling this order would not disrupt current operations.Blue Chip Company would incur an additional $1.80 per gear for shipping costs.Half of the manufacturing overhead costs are fixed and would be incurred no matter how many units are produced.In negotiating a price, how much is the minimum acceptable selling price?
A)$7.60
B)$5.80
C)$4.75
D)$6.55

Question

Blue Chip Company sells gears for $9 per unit.The unit cost of each gear follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 1.50 \
\text { Direct labor } & 2.20 \
\text { Manufacturing overhead } & 2.10 \
\text { Total } & \$ 5.80
\end{array}$$ An order to purchase 4,000 gears was recently received from a new customer.There is enough capacity to fill the order and filling this order would not disrupt current operations.Blue Chip Company would incur an additional $1.80 per gear for shipping costs.Half of the manufacturing overhead costs are fixed and would be incurred no matter how many units are produced.In negotiating a price, how much is the minimum acceptable selling price?
A)$7.60
B)$5.80
C)$4.75
D)$6.55

Quizplus · Accepted Answer

The minimum acceptable selling price per gear is calculated by adding the variable costs and the additional shipping costs. Variable costs include direct materials ($1.50), direct labor ($2.20), and variable manufacturing overhead (half of $2.10, which is $1.05). So, the total variable cost per gear is $1.50 + $2.20 + $1.05 = $4.75. Adding the additional shipping cost of $1.80 per gear, the total cost becomes $4.75 + $1.80 = $6.55. Fixed costs are not considered in the calculation of the minimum acceptable selling price for this additional order, as they would be incurred regardless of the order.

Blue Chip Company Sells Gears for $9 Per Unit An Order to Purchase 4,000 Gears Was Recently Received from Cost