Question

The StopGap Company makes a single product. The company has the capacity to produce 43.000 units per year. Production and sales costs per unit at the activity level above are: Direct Materials... Direct Labor.......... Variable MOH...... $20 Fixed MOH....... Variable Selling Expenses......... $8 Fixed Selling Expenses............. $2 The regular selling price per unit is $60. A special order has been received from the Outside Company to purchase 8,000 units next year. For this special order, the variable selling expense would be reduced by 10%. However, StopGap would have to purchase a specialized machine to engrave the Outside Company's name on each unit of the product in the special order. This machine would cost $12,000 and it would have no use after the special order was filled. If StopGap can expect to sell 34,000 units of its product next year through regular channels, at what special order price should StopGap be economically indifferent between either accepting or not accepting this special order from the outside Company? (Choose the closest answer) a) $51.20 b) $49.70 c) $42.20 d) $42.50 e) $43.70

Answer 1

B4 А в DE the indifferent price shall be the relevant cost per unit of manufacturing the special order. direct materials direct labor variable MOH variable selling expenses cost of specialized machine total relevant cost units in special order indifferent special order price $ 160,000 $ 80,000 $ 40,000 $ 57,600 $ 12,000 $ 349,600 8,000 $ 43.70 hence, the correct answer is e) $43.70

for formulas and calculations, refer to the image below -

А в the indifferent price shall be the relevant cost per unit of manufacturing the special order. + + + direct materials =20*8000 direct labor =10*8000 variable MOH =5*8000 variable selling expenses =8*90%*8000 cost of specialized machine 12000 total relevant cost =SUM(D4:08) units in special order 8000 indifferent special order price =D9/D10 + II 7 hence, the correct answer is e) $43.70

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