Question

Setting sales prices

The Walls Candy Company manufactures candy that is sold to food distributors. The company produces at full capacity for six months each year to meet peak demand during the “candy season” from Halloween through Valentine’s Day. During the other six months of the year, the manufacturing facility operates at 75% of capacity. The Walls Candy Company provides the following data for the year:

The Walls Candy Company receives an offer to produce 5,000 cases of candy for a special event. This is a one-time opportunity during a period when the company has excess capacity. What is the minimum selling price The Walls Candy Company should accept for the order? Explain why.

Answer 1

Sales Price

Sales price is the price at which the goods or services are sold in the market.

The WC Company should accept the special order at the minimum selling price of $9 per case. The selling price of $9 per case only has the variable product cost, that is, variable manufacturing cost of $7 per case and variable selling and administrative cost of $2 per case.

In this case, the fixed costs are not taken into consideration because the company gets the offer at the time of excess capacity. However, the fixed costs will be incurred whether the order is accepted or not. Hence, only the variable product cost of $9 is taken into consideration, and the selling price is fixed at $9 per case.