Question

arind Corporation manufactures shirts, and it is considering whether or not it should accept a special order for 9,000 shirts. The normal selling price of a shirt is $68 and its unit product cost is $20 as shown below: Direct materials $8.00 Direct labor $2.00 Manufacturing overhead $10.00 Unit product cost $20.00 Most of the manufacturing overhead is fixed; however, 30% of it is variable with respect to the number of shirts produced. The special order will require customizing the shirts for the customer with an additional direct materials cost of $5 per shirt and an additional direct labor cost of $5 per shirt. If it accepts this order, the company will have to rent special equipment to handle the shirt customization at a cost of $45,000. The order would have no effect on the company's regular sales and it could be fulfilled using the company’s existing capacity without affecting any other order. What is the minimum (i.e., the break-even) sales price per unit that the company should charge for this special order?

Answer 1

Per Shirt For 9000 Shirt 68 $ 612,000 Normal Selling Price of Shirt А Direct Material Direct Labour Manufacturing Overhead Additional Direct Material Cost Additional Direct Lobor Cost Additional Rental Cost $ $ $ $ $ 8 $ 2 $ 10 $ 5 $ 5 $ $ 72,000 18,000 90,000 45,000 45,000 45,000 Total cost for Producing 9000 shirts B $ 315,000 C = A-B $ 297,000 Profit on Production of 9000 shirts Hence, the order should be accepted Break even price is the price point at which all cost to produce the product is met and at that price point, there is no profit / loss to the company. $ Total cost for Producing 9000 shirts Break Even Price per shirt 315,000 35