Question

REQUIREMENT: Short term decision-making Hills Sdn. Bhd. produces a single product. The cost of producing and selling a single unit of this product at the company's normal capacity level of 40,000 units per month is as follows: Direct materials ..... ............... Direct labor Variable manufacturing over head ................ Fixed manufacturing overhead. Variable selling & administrative expense..... Fixed selling & administrative expense ......... RM38.80 RM9.70 RM2.30 RM18.10 RM1.70 RM8.80 The normal selling price of the product is RM81.10 per unit. A special order has been received from an overseas customer for 3,000 units to be delivered this month at a price below the prevailing normal selling 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 RM0.20 less per unit on this order than on normal sales. Direct labour is a variable cost in this company.

Please show me the step by step solution till get the answer. Really appreciate your help. Thank you.

Answer 1

Particulars @40,000 units	Price per unit	Total price
Direct materials	38.80	1,552,000
Direct labor	9.70	388,000
Variable mfg overhead	2.30	92,000
Fixed mfg overhead	18.10	724,000
Variable selling & admin overhead	1.70	68,000
Fixed selling & admin overhead	8.80	352,000
Total costs	79.40	3,176,000
Selling price	81.10	3,244,000
Profit	1.70	68,000

a)

Particulars @Additional 3,000 units	Price per unit	Total price
Direct materials	38.80	116,400
Direct labor	9.70	29,100
Variable mfg overhead	2.30	6,900
Fixed mfg overhead
Variable selling & admin overhead	1.70	5,100
Fixed selling & admin overhead	8.60	25,800
Total costs	61.10	183,300
Selling price	81.10	243,300
Profit	20.00	60,000

As the fixed manufacturing overhead does not apply in this case the company can expect a price below the normal selling price.

b) The opportunity cost of each unit delivered to the overseas customer would be the contribution margin lost which is the selling price minus the variable costs = $81.10 - $52.50 = $28.60

c) The minimum acceptable price per unit would be the cost of the 3,000 units as per the second table plus the fixed manufacturing overhead cost relevant to the 1,000 units that would be cut back = $183,300 + $18,100 = $201,400. Per unit price = $201,400 / 3,000 units = $67.13.