Question

AB Inc. currently produces a product with the following cost characteristics: Selling price $99 Variable costs-production 32 Variable costs - S&A 15 $925433 Total fixed costs Plant capacity 41678 Current product/sales volume 36782 A customer approaches AB Inc. for a special one-time order to purchase 10269 units at a reduced price No variable selling and administrative costs would be incurred on this special order. What is the minimum acceptable per unit price for this order? Select one: a. $74.21 b. $59.21 c. $32.00 d. $84.00 Check

Answer 1

Solution:

b. 59.21

Refer below workings

Selling Price	$                            99.00
Less: Variable Costs
Prodn	$                         (32.00)
S&A	$                         (15.00)
Contribution per unit	$                            52.00
Break even point in units
Fixed Costs/Contribution per unit	925433/52
	17,796.79

Plant Capacity (units)	41678
Current Sales Volume	36782
Available Excess Capacity	4896
Special order quantity	10269
No. of units to be sacrified to fulfill the special order
10269-4896	5373
Contribution lost on Sacrificed normal sales @ 52/unit
5373x52	$                 279,396.00
Variable costs of production for special order
10269x32	$                 328,608.00
Add: Contribution lost of sacrficed normal sales	$                 279,396.00
Minimum expected sales revenue	608004
No. of Units	10269
Minimum expected price per unit	608004/10269
	$                            59.21

Note:

1)The current sales is greater than the break even sales. Therefore, all the fixed costs are covered from the current sales, hence fixed costs should not be considered while calculating the minimum acceptable price for the special order.

2) In the given question the production capacity is constrain and the available spare capacity after meeting the regular sales volume is insufficient to meet the special order capacity. Therefore, while calculating the minimum acceptable price, the contribution lost on the number of sales units sacrificed to meet the special order along with the variable costs of production for the special order should be considered.

Hence, from the above calculations the minimum acceptable price per unit is $ 59.21