Vanana Tees sells its cool-zone t-shirts for $24 each.Unit product costs are as follows: $$\begin{array} { l r }
\text { Direct materials } & \$ 4.50 \
\text { Direct labor } & 1.80 \
\text { Manufacturing overhead } & 3.50 \
\text { Total } & \$ 9.80
\end{array}$$ A special order to purchase 1,200 shirts was recently received.There is enough capacity to fill the order.Filling this order will not disrupt current operations.Vanana expects to incur an additional $1.10 per unit for additional labor costs due to a slight modification the buyer wants made to the shirts.The manufacturing overhead costs consist of 30% allocated fixed costs.In negotiating a price, how much is Vanana Tees' minimum acceptable selling price per t-shirt?

Question

Vanana Tees sells its cool-zone t-shirts for $24 each.Unit product costs are as follows: $$\begin{array} { l r } 
\text { Direct materials } & \$ 4.50 \
\text { Direct labor } & 1.80 \
\text { Manufacturing overhead } & 3.50 \
\text { Total } & \$ 9.80
\end{array}$$ A special order to purchase 1,200 shirts was recently received.There is enough capacity to fill the order.Filling this order will not disrupt current operations.Vanana expects to incur an additional $1.10 per unit for additional labor costs due to a slight modification the buyer wants made to the shirts.The manufacturing overhead costs consist of 30% allocated fixed costs.In negotiating a price, how much is Vanana Tees' minimum acceptable selling price per t-shirt?

Quizplus · Accepted Answer

The minimum acceptable selling price per t-shirt can be calculated by adding the direct materials, direct labor (including the additional labor costs), and variable manufacturing overhead costs (since fixed costs are sunk and not relevant to the decision for the special order). Direct materials cost is $4.50, direct labor is $1.80 + $1.10 (additional labor) = $2.90, and variable manufacturing overhead (70% of $3.50, since 30% is fixed) is $2.45. Adding these together gives $4.50 + $2.90 + $2.45 = $9.85. Fixed costs are not considered in the calculation for a special order pricing decision when there is excess capacity.

Vanana Tees Sells Its Cool-Zone T-Shirts for $24 Each A Special Order to Purchase 1,200 Shirts Was Recently Received