Question

The following are the Jensen Corporation's unit costs of making and selling an item at a volume of 1,000 units per month (which represents the company's capacity):

  

Manufacturing:
Direct materials	$1.00
Direct labor	$2.00
Variable overhead	$0.50
Fixed overhead	$0.40
Selling and Administrative:
Variable	$2.00
Fixed	$0.80

Present sales amount to 700 units per month. An order has been received from a customer in a foreign market for 100 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 700 units and 1,000 units. The variable selling and administrative expenses would have to be incurred on this special order as well as for all other sales. Direct labor is a variable cost.

Assume the company has 50 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company's other sales. Which of the following costs is relevant in this decision?

$3.50 variable manufacturing cost

$6.70 full cost

$2.00 variable selling and administrative cost

$3.90 unit product cost

Answer 1