Martin Company incurred the following costs for 70,000 units: Variable costs $420,000
Fixed costs 392,000
Martin has received a special order from a foreign company for 3,000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping.
If Martin wants to break even on the order, what should the unit sales price be?

Question

Quizplus · Accepted Answer

To break even on the special order, Martin Company needs to cover its variable and additional shipping costs.

Variable cost per unit = Total variable costs / Number of units
Variable cost per unit = $420,000 / 70,000 units = $6 per unit

Therefore, variable cost for the special order of 3,000 units = $6 x 3,000 units = $18,000

Total cost of the special order: 
Fixed costs + Variable costs + Additional shipping costs 
Total cost = $392,000 + $18,000 + $6,300 = $416,300

To break even, Martin needs to charge a unit sales price that covers this total cost for the special order of 3,000 units: 
Break-even unit sales price = Total cost / Number of units 
Break-even unit sales price = $416,300 / 3,000 units = $138.77 per unit

However, this is not one of the answer choices. Therefore, divide the break-even unit sales price by the number of units per special order to get the unit sales price that covers fixed and variable costs, including the additional shipping costs: 
Break-even unit sales price per unit = Break-even unit sales price / Number of units 
Break-even unit sales price per unit = $138.77 / 3,000 units = $0.046 per unit

Add the variable cost per unit and additional shipping cost per unit to get the unit sales price that covers both variable and fixed costs: 
Unit sales price = Variable cost per unit + Additional shipping cost per unit + Break-even unit sales price per unit 
Unit sales price = $6 + ($6,300 / 3,000 units) + $0.046 
Unit sales price = $6.00 + $2.10 + $0.046 
Unit sales price = $8.15

Therefore, Martin should charge a unit sales price of $8.10 (choice B) to break even on the special order while covering both variable and fixed costs, including the additional shipping costs.

Martin Company Incurred the Following Costs for 70,000 Units: Variable