Mckerchie Inc. manufactures industrial components. One of its products, which is
ID: 2477374 • Letter: M
Question
Mckerchie Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as G62. Data concerning this product are given below:
Per unit
Selling price.................................................... $160
Direct materials.............................................. $13
Direct labor................................................... $7
Variable manufacturing overhead................... $6
Fixed manufacturing overhead...................... $29
Variable selling expense.............................. $2
Fixed selling and administrative expense...... $10
The above per unit data are based on annual production of 9,000 units of the component. Direct labor can be considered to be a variable cost.
The company has received a special, one-time-only order for 300 units of component G62. 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 would not be affected by the order. Assuming that Mckerchie 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 should not go?
$26
$67
$55
Explanation / Answer
Answer:
Since the company has excess capacity and can fill the order without cutting back on the production of any product, the minimum price per unit on the special order should not go below that the total variable cost per unit which company will incur on making this product.
Fixed Cost is sunk cost, hence it will remain same whether company receive or not receive the special order. Therefore Fixed Cost is not considered.
Variable Selling Expenses will aslo not incur.
Hence the total variable manufacturing cost per unit = Direct Material + Direct Labor + Variable Manufcturing overhead = $13 + 7 + 6 = $26
The minimum price per unit on the special order below which the company should not go $26 per unit