The following are the Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month (which represents the company's capacity): Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labor is a variable cost.
-Assume the company has 50 units left over from last year which have small defects and which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. What cost is relevant as a guide for setting a minimum price on these defective units?
A) $6.50
B) $5.00
C) $1.50
D) $3.50

Question

The following are the Wyeth Company's unit costs of making and selling an item at a volume of 10,000 units per month (which represents the company's capacity):  Present sales amount to 9,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labor is a variable cost.
-Assume the company has 50 units left over from last year which have small defects and which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. What cost is relevant as a guide for setting a minimum price on these defective units?
A) $6.50 
B) $5.00 
C) $1.50 
D) $3.50

Quizplus · Accepted Answer

The relevant cost for setting a minimum price on the defective units is the incremental cost of selling them, which is $1.50. This is the cost that would be avoided if the units were not sold.

The Following Are the Wyeth Company's Unit Costs of Making