Tripoli Corporation manufactures batons.Tripoli can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000.Based on Tripoli's predictions,240,000 batons will be sold at the regular price of $5.00 each.In addition,a special order was placed for 60,000 batons to be sold at a 40 percent discount off the regular price.The unit relevant cost per unit for Tripoli's decision is

Question

Quizplus · Accepted Answer

Variable cost per baton = $750,000/300,000 = $2.50
Fixed cost per baton = $450,000/300,000 = $1.50
Total cost per baton = $2.50 + $1.50 = $4.00

For the regular sales of 240,000 batons at $5.00 each, Tripoli will earn a revenue of:
240,000 x $5.00 = $1,200,000

For the special order of 60,000 batons at a 40% discount off the regular price of $5.00, Tripoli will earn a revenue of:
60,000 x $3.00 = $180,000

The total revenue for Tripoli will be:
$1,200,000 + $180,000 = $1,380,000

The total relevant cost for Tripoli will be:
300,000 x $4.00 = $1,200,000

Therefore, the total profit for Tripoli will be:
$1,380,000 - $1,200,000 = $180,000

The unit relevant cost per unit for Tripoli's decision is:
Total relevant cost/Total number of batons = $1,200,000/300,000 = $4.00

Since the revenue from the special order exceeds the variable cost per unit of the batons, it is profitable for Tripoli to accept the special order. Therefore, the best choice for Tripoli is to accept the special order for 60,000 batons at a 40% discount off the regular price.

Tripoli Corporation Manufactures Batons