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. Assume there is no excess capacity (i.e., the company can sell every unit that it produces to regular customers). Under the general decision rule, the minimum price per unit for this special order would be:
A)$10.00
B)$7.25
C)$5.75
D)$6.50

Question

Quizplus · Accepted Answer

Under the general decision rule, the minimum price per unit for a special order should be equal to or greater than the incremental cost per unit. Incremental cost per unit is the additional variable cost incurred for producing the special order. 
For the special order, the incremental cost per unit can be calculated as follows:
Direct materials + Direct labour + Variable overhead + (Fixed overhead/unit - no longer applicable) - Sales commission (not applicable for special order)
= $3.50 + $2.00 + $1.00 + $0.00 - $0.50
= $6.00

Hence, the minimum price per unit for the special order should be $6.00 or higher. As the offer price of $7.25 per unit is higher than the incremental cost per unit of $6.00, the manufacturer should accept the special order. Therefore, the best choice is B) $7.25.

A Manufacturer Operating with Excess Capacity Has Been Asked to Fill