Question

Cane Company manufactures two products called Alpha and Beta that sell for $120 and $80 respectively. Each product uses only one type of raw material that costs $6 per pound. The company has the capacity to produce 100,000 units annually of each product. Its unit costs for each product at this level of activity are as follows:

   Alpha Beta

Direct Materials	$30	$12
Direct Labor	20	15
Variable Manufacturing	7	5
Traceable Fixed Manufacturing	16	18
Variable Selling Expense	12	8
Common Fixed Expense	15	10
Total cost per unit	$100	$68

Assume that Cane expects to produce and sell 91,000 Alphas during the current year. One of the Cane's sales representatives has found a new customer that is willing to buy 10,000 additional. If Cane accepts the customer's offer, it will decrease Alpha sales to regular customers by 1,000 units. What is the minimum price per unit that Cane accept on this special order?

Answer 1

	Alpha
Direct Materials	30
Direct Labor	20
Variable Manufacturing overhead	7
Variable Selling Expense	12
Total variable cost per unit	69
	Special order
Total variable cost	690000	=10000*69
Contribution margin lost on regular sales	51000	=1000*(120-69)
Total cost of special order	741000
Divide by units	10000
Minimum price per unit	74.10