Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 97

Accept special sales order? Circuit Masters, Inc. (CMI), is presently operating at 80% of capacity and manufacturing 120,000 units of a patented electronic component. The cost structure of the component is as follows:

Raw materials	$ 6.00 per unit
Direct labor	6.00 per unit
Variable overhead	8.00 per unit
Fixed overhead	$480,000 per year

An Italian firm has offered to purchase 20,000 of the components at a price of $24 per unit, FOB CMI’s plant. The normal selling price is $32 per component. This special order will not affect any of CMI’s “normal” business. Management calculated that the cost per component is $24, so it is reluctant to accept this special order.

Required:

a. Show how management came up with a cost of $24 per unit for this component.

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b. Evaluate this cost calculation. Explain why it is or is not appropriate.

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c. Should the offer from the Italian firm be accepted? Why or why not?

Step 1 of 3

a) The computation of cost per unit is as follows:

Table 1: Computation of cost per unit

Particulars	Amount
Raw materials per unit	$6.00
Direct labor per unit	6.00
Variable overhead per unit	8.00
Fixed overhead per unit (Note: a)	4.00
Total cost per unit	$24.00

Note a: The fixed overhead per unit is calculated as:

Thus, Fixed overhead per unit is per unit.