Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 34

Special Order Alton Inc. is working at full production capacity producing 20,000 units of a unique product. Manufacturing costs per unit for the product are

Direct materials	$9
Direct labor	8
Manufacturing overhead	10
Total manufacturing cost	$27

The unit manufacturing overhead cost is based on a $4 variable cost per unit and $120,000 fixed costs. The nonmanufacturing costs, all variable, are $8 per unit, and the sales price is $45 per unit.

Sports Headquarters Company (SHC) has asked Alton to produce 5,000 units of a modification of the new product. This modification would require the same manufacturing processes. SHC has offered to share the nonmanufacturing costs equally with Alton. Alton would sell the modified product to SHC for $35 per unit.

Required

1. Should Alton produce the special order for SHC? Why or why not?

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2. Suppose that Alton Inc. had been working at less than full capacity to produce 16,000 units of the product when SHC made the offer. What is the minimum price that Alton should accept for the modified product under these conditions?

Step 1 of 3

Fixed costs are costs which does not changes with change in level of production. Variable costs are costs which does changes with change in level of production. Breakeven is point of no profit i.e. where revenue is equal to total costs.