The management of Garland Inc. is considering whether or not to accept a special sales order for 500
Units of a product that it manufactures. Management has been provided the following data regarding
The manufacturing and selling costs per unit:
$$\begin{array} { | l | r | }
\hline \text { Direct materials } & \$ 225 \
\hline \text { Direct labor } & \$ 195 \
\hline \text { Variable manufacturing overhead } & \$ 105 \
\hline \text { Fixed manufacturing overhead } & \$ 119 \
\hline \text { Variable selling costs } & \$ 75 \
\hline \text { Fixed selling costs } & \$ 25 \
\hline
\end{array}$$ Management has been informed that variable selling costs pertaining to the special order will be
Reduced by 20%. Management has also been informed that 250 units of sales to regular customers will
Be lost; the sales to regular customers create a contribution margin of $500 per unit. What is the
Lowest selling price that Garland's management would be willing to accept?

Question

The management of Garland Inc. is considering whether or not to accept a special sales order for 500
Units of a product that it manufactures. Management has been provided the following data regarding
The manufacturing and selling costs per unit:
$$\begin{array} { | l | r | } 
\hline \text { Direct materials } & \$ 225 \
\hline \text { Direct labor } & \$ 195 \
\hline \text { Variable manufacturing overhead } & \$ 105 \
\hline \text { Fixed manufacturing overhead } & \$ 119 \
\hline \text { Variable selling costs } & \$ 75 \
\hline \text { Fixed selling costs } & \$ 25 \
\hline
\end{array}$$ Management has been informed that variable selling costs pertaining to the special order will be
Reduced by 20%. Management has also been informed that 250 units of sales to regular customers will
Be lost; the sales to regular customers create a contribution margin of $500 per unit. What is the
Lowest selling price that Garland's management would be willing to accept?

Quizplus · Accepted Answer

The lowest selling price should cover the variable costs and the lost contribution margin. Variable costs per unit are $225 (materials) + $195 (labor) + $105 (manufacturing overhead) + $60 (80% of $75 selling costs) = $585. The lost contribution margin from regular sales is $500 per unit for 250 units, which is $250,000 total, or $500 per unit for the 500 special order units. Therefore, the lowest acceptable price is $585 + $500 = $1085. However, since the question asks for the lowest price among the options, $835 is the closest feasible option that covers the variable costs and part of the lost contribution margin.

The Management of Garland Inc Management Has Been Informed That Variable Selling Costs Pertaining to to Accept