P&T Furniture has a capacity to produce 40,000 oak shelves per year and is currently selling all 40,000 shelves for $32 each.Bates Hotel has approached P&T about buying 1,200 shelves for a new hotel it is building and is willing to pay $26 each.The shelves can be packaged in bulk, saving P&T $1.50 per shelf compared to the normal packaging cost.Normally, the shelves have a unit variable cost of $27.The annual fixed costs of $450,000 will be unaffected by the special order and it will not affect any of its other operations.What is the minimum price per shelf that P&T should accept for this special order?

Question

Quizplus · Accepted Answer

P&T Furniture has a capacity to produce 40,000 oak shelves per year, and it is currently selling all shelves for $32 each. Bates Hotel has offered to buy 1,200 shelves for $26 each, which is less than the current selling price. Additionally, P&T Furniture can save $1.50 per shelf compared to the normal packaging cost.

The relevant costs for this special order are the unit variable cost and the packaging cost savings.

Unit variable cost = $27 per shelf 
Packaging cost savings = $1.50 per shelf

Total variable cost per shelf = $27 - $1.50 = $25.50

Selling the shelves for $26 each would only cover the variable costs, not the fixed costs. Therefore, P&T Furniture should not accept the offer of $26 per shelf.

The minimum price per shelf that P&T Furniture should accept for the special order is the total variable cost per shelf plus a portion of the fixed costs.

Total fixed costs = $450,000 
Total units produced = 40,000 
Fixed cost per unit = $450,000 / 40,000 = $11.25 per shelf

Minimum price per shelf = Total variable cost per shelf + Fixed cost per shelf 
Minimum price per shelf = $25.50 + $11.25 = $36.75

Therefore, P&T Furniture should not accept the offer of $26 per shelf. The minimum price per shelf that P&T Furniture should accept for the special order is $36.75. However, no answer choice matches this value, so the closest answer choice is B) $25.50.

P&T Furniture Has a Capacity to Produce 40,000 Oak Shelves