Homework Answers
1) if the special order is accepted, there will be additional contribution on the 5,000 units. But there will be loss of contribution on the Normal 1,500 units because the capacity is 60,000 units.
Variable cost per unit = $5 + $4 + $1 + $0.75 = $10.75
Additional contribution to on 5,000 units = ($15 - $10.75) * 5,000 = $21,250
Loss of contribution on 1,500 regular units = ($23 - $10.75) * 1,500 = $18,375
Increase in annual profits = $21,250 - $18,375
Increase in annual profits = $2,875
2) the production costs were incurred last year, hence they are susk. The variable selling and administrative expenses are the only relevant costs for these inferior units.
Hence, the company must recover at least this selling and administrative expense of $0.75 per unit.
Minimum selling price = $0.75 per unit
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