Question

The following are Silver Corporation's unit costs of making and selling an item at a volume of 9,400 units per month (which represents the company's capacity):

Manufacturing:
Direct materials	$	3.00
Direct labor	$	4.00
Variable overhead	$	2.50
Fixed overhead	$	0.85
Selling and administrative:
Variable	$	4.00
Fixed	$	1.25

Present sales amount to 6,400 units per month. An order has been received from a customer in a foreign market for 3,000 units. The order would not affect regular sales. Total fixed costs, both manufacturing and selling and administrative, would not be affected by this order. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume that direct labor is a variable cost.

Assume the company has 100 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company's other sales. Which of the following costs is relevant in this decision?

(A) $9.50 variable manufacturing cost

(B) $10.35 unit product cost

(C) $4.00 variable selling and administrative cost

(D) $15.60 full cost

Answer 1

Present sales in unit	6400
Add:
Special order sales unit	3000
Total	9400
Since the above total units are within the capacity of the company there is no opportunity cost.
Therefore relevant cost would be variable manufacturing and variable selling and administrative cost.
Those,
Relevant cost
(A) $9.50 variable manufacturing cost
(C) $4.00 variable selling and administrative cost