Answer:
a. $20.00
b. $28,75
Explanation:
Find the total incremental costs to satisfy the special order and add $2.00 profit (because we are aiming for a profit not to just break-even).
<u>Calculation of Total Incremental Unit Costs</u>
Direct materials $6
.00
Direct labor $4.00
Variable Overheads (2/3 × $9) $6.00
Shipping Cost $2.00
Total Incremental Unit Cost $18.00
<em>Add</em> Profit Element $2.00
Unit Selling Price for the Special Order $20.00
In this case no changes will occur on fixed overheads, hence it is irrelevant.
<u>Calculation of Desired Net Operating Income</u>
Sales ($28 × 160,000 units) $4,480,000
Less Product Costs :
Direct materials ($6
.00 × 160,000 units) ($960,000)
Direct labor ($4.00 × 160,000 units) ($640,000)
Variable Overheads ($6.00 × 160,000 units) ($960,000)
Fixed Overheads ($3.00 × 160,000 units) ($480,000)
Current Operating Income $1,440,000
Add Desired Increase in Operating Income $60,000
Desired Operating Income $1,500,000
Unit Profit = $1,500,000 ÷ 160,000 units
= $9.375
Unit Profit = Unit Selling Price - Total Unit Costs - Unit Incremental Profit
therefore,
Unit Selling Price = Unit Profit + Total Unit Costs + Unit Incremental Profit
= $9.375 + $19.00 + $0.375
= $28,75
