Question

Davis Kitchen Supply produces stoves for commercial kitchens. The costs to manufacture and market the stoves at the company's normal volume of 6,000 units per month are shown in the following table.

Unit manufacturing costs
Variable materials	$	52
Variable labor		77
Variable overhead		27
Fixed overhead		62
Total unit manufacturing costs				$	218
Unit marketing costs
Variable		27
Fixed		72
Total unit marketing costs					99
Total unit costs				$	317

Davis has an opportunity to enter a highly competitive foreign market. An attraction of the foreign market is that its demand is greatest when the domestic market's demand is quite low; thus, idle production facilities could be used without affecting domestic business. An order for 2,000 units is being sought at a below-normal price to enter this market. For this order, shipping costs will total $42 per unit; total (marketing) costs to obtain the contract will be $2,000. No other variable marketing costs would be required on this order, and it would not affect domestic business. What is the minimum unit price that Davis should consider for this order of 2,000 units?

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	Minimum unit price

An inventory of 460 units of an obsolete model of the stove remains in the stockroom. These must be sold through regular channels (thus incurring variable marketing costs) at reduced prices or the inventory will soon be valueless. What is the minimum acceptable selling price for these units?

Answer 1

Answer is given below

1 Minimum Unit price Total units Direct Materials Direct Labor Variable Manufacturing Overhead Shipping cost Marketing cost Total Relevant Cost Total units Minimum Unit price Per Unit 2,000 $104,000 $52.00 $154,000 $77.00 $54,000 $27.00 $84,000 $42.00 $2,000 $1.00 $398,000 $199.00 $2,000 $199.00 2 Relevant cost Direct Material Direct Labor Variable manufacturing overhead Variable marketing cost Total Relevant cost per unit S183 Minimum acceptable selling price is $ 183 per unit