Question

Tarind Corporation manufactures shirts, and it is considering whether or not it should accept a special order for 13,000 shirts. The normal selling price of a shirt is $59 and its unit product cost is $20 as shown below: Direct materials Direct labor Manufacturing overhead Unit product cost $8.00 $2.00 $10.00 $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 $4 per shirt and an additional direct labor cost of $3 per shirt. If it accepts this order, the company will have to rent special equipment to handle the shirt customization at a cost of $130,000. 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 (1.e., the break-even) sales price per unit that the company should charge for this special order?

Answer 1

Minimum selling price to be charged for special order=$ 30 per unit.

Workings:-

Particulars	Amt. in $ p.u.	Workings
Direct materials	8
Direct labor	2
Variable Manufacturing overhead	3	10*30%
Additional direct material cost	4
Additional direct labor cost	3
Rent charges of special equipment*	10	130000/13000
Minimum selling price to be charged for special order	30

* Rent paid for special equipment is an avoidable fixed cost, hence the same has been added to calculate the minimum selling price per unit for special order.