Question

Kava Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as K65. Data concerning this product are given below:
Per Unit

Selling price $180
Direct materials $29
Direct labor $5
Variable manufacturing overhead $4
Fixed manufacturing overhead $21
Variable selling expense $2
Fixed selling and administrative expense $17

The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered to be a variable cost. (Source: CMA, adapted) The company has received a special, one-time-only order for 500 units of component K65. There would be no variable selling expense on this special order, and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company wouldn't be affected by the order. Assuming that Kava has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company shouldn't go?

a. $180
b. $59
c. $78
d. $38

Answer 1

Answer:

D. $38

Explanation:

The minimum price at which the company should not go below is the price that covers both manufacturing and non manufacturing cost , to meet the special and one time order only.

The per unit cost of the special order will be computer

Unit cost of the special order

Direct materials

$29

Direct labor

$5

Variable manufacturing overhead

$4

Total cost

$38.

Therefore, the minimum price per unit on the special order below which the company shouldn't go is $38.

Note that we are not considering fixed costs because they are irrelevant ; meaning that they would be incurred whether or not the special order is accepted.