Question

JCN Industries normally produces and sells 5,000 keyboards for personal computers each month. Variable manufacturing costs amount to $25 per unit, and fixed costs are $146,000 per month. The regular sales price of the keyboards is $86 per unit. JCN has been approached by a foreign company that wants to purchase an additional 1,000 keyboards per month at a reduced price. Filling this special order would not affect JCN 's regular sales volume or fixed manufacturing costs.

On the basis of the above information only, which of the following is not true?

Multiple Choice

• At the 6,000-unit level of production, JCN's average cost per unit is $49.33.

• The fixed manufacturing costs of $146,000 are not relevant to this decision regarding the special order.

• At the 5,000-unit level of production, JCN's average cost per unit is $54.20.

• It would not be profitable for JCN to consider the special order at a price less than $49 per unit.

Answer 1

The statement that it would not be profitable for JCN to consider the special order at a price less than $49 per unit is not true as for JCN a price less than its variable cost will not be profitable. Hence this statement is not true.

At 6,000 unit, average cost per unit is $49.33 (25+146,000/6,000). Hence this option is correct.

The fixed manufacturing cost of $146,000 are not relevant which is true as fixed cost of $146,000 will remain the same whether company produces more or less than its normal production. Hence in this statement acceptance or rejection of special order will not affect the fixed cost.

At 5,000 units, average cost per unit is $54.20 which is calculated as ($25 + 146,000/5,000). Hence this option is also true