Farnsworth Television makes and sells portable television sets. Each television regularly sells for £200. The following cost data per television are based on a full capacity of 12,000 televisions produced each period:$\begin{array}{lrr}
\text { Direct materials } &£75\
\text { Direct labour } &£55\
\text {Manufacturing overhead ( $ 75 \% $ variable and $ 25 \% $ unavoidable fixed) } &£48\

\end{array}$

Farnsworth has received a special order for a sale of 2,500 televisions to an overseas customer. The only selling costs that would be incurred on this order would be £10 per television for shipping. Farnsworth is now selling 7,200 televisions through regular distributors each period. What should be the minimum selling price per television in negotiating a price for this special order

A)£200
B)£166
C)£178
D)£176

Question

Farnsworth Television makes and sells portable television sets. Each television regularly sells for £200. The following cost data per television are based on a full capacity of 12,000 televisions produced each period:$\begin{array}{lrr}
  \text { Direct materials } &£75\
 \text { Direct labour } &£55\
 \text {Manufacturing overhead ( \( 75 \% $ variable and $ 25 \% $ unavoidable fixed)  } &£48\

\end{array}\)

Farnsworth has received a special order for a sale of 2,500 televisions to an overseas customer. The only selling costs that would be incurred on this order would be £10 per television for shipping. Farnsworth is now selling 7,200 televisions through regular distributors each period. What should be the minimum selling price per television in negotiating a price for this special order

A)£200
B)£166
C)£178
D)£176

Quizplus · Accepted Answer

To determine the minimum selling price per television for the special order, we need to calculate the incremental cost of producing and shipping 2,500 televisions.

Incremental cost per television = Total cost of producing and shipping 12,500 televisions - Total cost of producing and shipping 10,000 televisions
= (12,000 x (£100 + £70 + £20)) + (2,500 x (£100 + £70 + £10)) - (10,000 x (£100 + £70 + £20))
= £2,540,000

Incremental cost per television = £2,540,000 / 2,500 = £1,016

Therefore, the minimum selling price per television for the special order would be the regular selling price of £200 plus the incremental cost per television of £1,016, plus the additional shipping cost of £10.

Minimum selling price per television = £200 + £1,016 + £10 = £1,226

Since the minimum selling price is higher than the regular selling price of £200, Farnsworth should accept this special order only if it is profitable as they might face additional risks and uncertainties in such transactions,Therefore, the best choice is D.

Farnsworth Television Makes and Sells Portable Television Sets Farnsworth Has Received a Special Order for a Sale of Regularly