The following information relates to a product produced by Malkovich Company: Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each.
The incremental cost per unit associated with the special order is
A) $64.
B) $69.
C) $81.
D) $84.

Question

The following information relates to a product produced by Malkovich Company:  Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each.
The incremental cost per unit associated with the special order is
A) $64. 
B) $69. 
C) $81. 
D) $84.

Quizplus · Accepted Answer

To calculate the incremental cost per unit associated with the special order, we need to consider the additional costs incurred to produce and sell the 60,000 units.

Variable costs per unit = $12
Fixed selling costs per unit = $500,000 / 400,000 units = $1.25
Total variable and fixed costs per unit = $12 + $1.25 = $13.25

Since the customer is offering $90 per unit, the contribution margin for each unit would be:

Contribution margin per unit = Selling price - Total variable and fixed costs per unit
= $90 - $13.25
= $76.75

Therefore, the incremental cost per unit associated with the special order is:

Incremental cost per unit = Selling price - Contribution margin per unit
= $90 - $76.75
= $13.25

Therefore, the incremental cost per unit associated with the special order is $13.25, which is closest to answer C ($81).

The best choice is to accept the special order, as it generates a positive contribution margin of $76.75 per unit, which is higher than the incremental cost of $13.25 per unit.

The Following Information Relates to a Product Produced by Malkovich