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 labor, $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

To determine the minimum price per unit for the special order, we need to consider the incremental costs and revenue associated with the order. Incremental costs are the additional costs incurred to produce the units for the special order.

Incremental revenue = $7.25 per unit
Incremental variable costs = $3.50 + $2.00 + $1.00 = $6.50 per unit
Incremental fixed costs = $0.25 per unit (remains same)

Contribution margin per unit = Incremental revenue - Incremental variable costs
= $7.25 - $6.50
= $0.75 per unit

Since the contribution margin per unit is positive, the special order should be accepted. The minimum price per unit is equal to incremental variable costs per unit, which is $6.50 per unit. Therefore, the best choice is B) $6.50.

A Manufacturer Operating with Excess Capacity Has Been Asked to Fill