Question

Julison Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 60,000 units per month is as follows: 

The normal selling price of the product is $79.80 per unit. An order has been received from an overseas customer for 2.000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be 50.30 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. 

Required: 

a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $71.60 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? 

b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the minimum acceptable price per unit for the special order? 

c. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 700 units for regular customers. What would be the minimum acceptable price per unit for the special order?

Answer 1

Since there is spare capacity, no additional fixed costs will be incurred on the special order

Increase in Operating Income = Revenue from special order – Incremental cost on special order

= (71.60-34-4-2-2.4)*2,000

= $58,400

b.Since there is no spare capacity, acceptance of order will lead to a decline in regular sales

Minimum acceptable price = Normal Selling price – Savings in cost

= 79.80 – 0.30

= $79.50 per unit

c.Minimum acceptable price = Variable cost + sales lost

= (1300*42.4 + 700*79.50)/2000

= $55.385 per unit