Elfalan Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 51,000 units per month is as follows: The normal selling price of the product is $108.10 per unit.An order has been received from an overseas customer for 3,100 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $2.30 less per unit on this order than on normal sales.Direct labor is a variable cost in this company.Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,250 units for regular customers. The minimum acceptable price per unit for the special order is closest to: (Round your intermediate calculations to 2 decimal places.)
A) $108.10 per unit
B) $92.10 per unit
C) $69.10 per unit
D) $79.18 per unit

Question

Elfalan Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 51,000 units per month is as follows:  The normal selling price of the product is $108.10 per unit.An order has been received from an overseas customer for 3,100 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $2.30 less per unit on this order than on normal sales.Direct labor is a variable cost in this company.Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,250 units for regular customers. The minimum acceptable price per unit for the special order is closest to: (Round your intermediate calculations to 2 decimal places.)
A) $108.10 per unit 
B) $92.10 per unit 
C) $69.10 per unit 
D) $79.18 per unit

Quizplus · Accepted Answer

The contribution margin per unit for normal sales can be calculated as follows:

Selling price per unit - Cost per unit
= $108.10 - ($50.00 + $5.90 + $22.70 + $9.40 + $3.10)
= $16.00

The variable selling and administrative expense per unit for normal sales is $1.90.

The variable selling and administrative expense per unit for the special order would be $2.30 less than normal sales, so it would be $1.90 - $2.30 = -$0.40 per unit.

If the company accepts the special order, it would lose $0.40 per unit on variable selling and administrative expenses compared to normal sales. However, it would still make a $16.00 contribution margin per unit.

The production of 3,100 units for the special order would require the company to cut back production of 1,250 units for regular customers. Thus, the company would lose 1,250 units * $16.00 = $20,000 in contribution margin if it accepts the special order.

The cost of producing and selling 3,100 units is:
Fixed costs = $106,500
Variable costs = 3,100 * ($50.00 + $5.90 + $22.70 + $9.40 - $2.30) = $202,870

Total cost = Fixed costs + Variable costs
= $309,370

The minimum acceptable price per unit for the special order can be calculated as follows:

Minimum acceptable price per unit = (Total cost - Opportunity cost) / Units sold
= ($309,370 - $20,000) / 3,100
= $90.11

Therefore, the best choice is D, $79.18 per unit, because it is less than the minimum acceptable price per unit of $90.11. Accepting the special order at this price would generate a positive contribution margin of $16.00 - $4.30 = $11.70 per unit, which is greater than the normal contribution margin per unit.

Elfalan Corporation Produces a Single Product