The Melrose Corporation produces a single product, Product C. Melrose has the capacity to produce 70,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows:

The regular selling price of one unit of Product C is $100. A special order has been received by Melrose from Moore Corporation to purchase 7,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special order. The machine will cost $10,500 and will have no use after the special order is filled. Assume that direct labor is a variable cost.

-Assume that Melrose expects to sell 60,000 units of Product C to regular customers next year. At what selling price for the 7,000 units would Melrose be economically indifferent between accepting and rejecting the special order from Moore?
A)$53.00
B)$54.50
C)$75.00
D)$76.50

Question

The Melrose Corporation produces a single product, Product C. Melrose has the capacity to produce 70,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows:

The regular selling price of one unit of Product C is $100. A special order has been received by Melrose from Moore Corporation to purchase 7,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special order. The machine will cost $10,500 and will have no use after the special order is filled. Assume that direct labor is a variable cost.

-Assume that Melrose expects to sell 60,000 units of Product C to regular customers next year. At what selling price for the 7,000 units would Melrose be economically indifferent between accepting and rejecting the special order from Moore?
A)$53.00 
B)$54.50 
C)$75.00 
D)$76.50

Quizplus · Accepted Answer

Melrose should consider the opportunity cost of accepting the special order. If they accept the special order, they will not be able to sell 7,000 units at the regular selling price of $65. Therefore, the revenue they would forgo is:
(7,000 units x $65/unit) = $455,000
In order for Melrose to be economically indifferent between accepting or rejecting the special order, they need to make at least $455,000 in revenue from the special order. Since they will be selling 7,000 units, the price per unit they need to set is:
$455,000 ÷ 7,000 units = $65.00/unit - $6.50/unit = $58.50/unit
Therefore, Melrose should accept the special order if Moore is willing to pay at least $54.50/unit ($58.50 - $4.00). Choice B is the correct answer.

The Melrose Corporation Produces a Single Product, Product C