Question

The following are Silver Corporation's unit costs of making and selling an item at a volume of 8,300 units per month (which represents the company's capacity): Manufacturing: Direct materials Direct labor Variable overhead Fixed overhead Selling and administrative: Variable Fixed $ $ $ $ 1.10 2.10 0.60 0.45 $ $ 2.10 0.85 Present sales amount to 7,200 units per month. An order has been received from a customer in a foreign market for 1,100 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 laboris a variable cost. Assume the company has 55 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.3.80 variable manufacturing cost

B.4.25 unit product cost

C.2.10 variable selling and administrative cost

D.7.20 full cost

Answer 1

The correct option is 'C. $2.10 variable selling and administrative cost'. The product costs have already been incurred, thus they are sunk costs and not relevant. Variable selling and administrative costs will be incurred on selling these 55 units. Thus it is relevant cost.