Question

Rexall Industries produces latches for cabinet doors. They typically sell their latches to cabinet manufacturers who then use them in their cabinet construction. The cost of a latch is given below:

Direct materials	$1.50
Direct labor	$0.40
Variable overhead	$1.20
Fixed overhead	$1.00

Each unit sells for $7.00.

Currently, Rexall is operating at 490,000 units and has capacity to produce 500,000 units.

Rexall has received a special order for 20,000 units of an upgraded latch from a home improvement store. The special order would require materials of $2.50 per unit (direct labor costs and variable overhead costs would be the same per unit; fixed overhead would not be affected). Clearly, 10,000 units of regular sales would be lost if the special order is accepted.

Answer and Show Work:

(1) Compute the opportunity cost of accepting this order.

(2) Compute the minimum acceptable price for this order.

Opportunity cost of accepting the order
Minimum acceptable price for the order (total for the entire 20,000 units)

Answer 1