Southern Digital,Inc.
The Southern Digital,Inc.produces a high-quality computer chip.Unit production costs (based on capacity production of 100,000 units per year)follow:
Direct material $50
Directlabor 20
Overhead(20% variable) 10
Other information:
Sales price 100
SG\&A costs(40% variable) &nbsp15

Refer to Southern Digital,Inc.Assume,for this question only,that the Memory Division is operating at a level of 70,000 chips per year.What is the minimum price that the division would consider on a "special order" of 1,000 chips to be distributed through normal channels?

Question

Southern Digital,Inc.
The Southern Digital,Inc.produces a high-quality computer chip.Unit production costs (based on capacity production of 100,000 units per year)follow:
Direct material                               $50
Directlabor                                      20
Overhead(20% variable)                10
Other information:
Sales price                                      100
SG\&A costs(40% variable)           &nbsp15

Refer to Southern Digital,Inc.Assume,for this question only,that the Memory Division is operating at a level of 70,000 chips per year.What is the minimum price that the division would consider on a "special order" of 1,000 chips to be distributed through normal channels?

Quizplus · Accepted Answer

The minimum price that the division would consider on a "special order" of 1,000 chips to be distributed through normal channels is $78. This is because the division would need to cover its variable costs of $50 (direct material) + $20 (direct labor) + $10 (variable overhead) + $6 (variable SG&A) = $86 per unit. The division would also need to cover its fixed costs of $10 (fixed overhead) + $9 (fixed SG&A) = $19 per unit. Therefore, the minimum price that the division would consider is $86 + $19 = $105 per unit. However, since the division is operating at a level of 70,000 chips per year, it has excess capacity. This means that the division can produce the 1,000 chips without incurring any additional fixed costs. Therefore, the division can afford to sell the chips at a price below $105 per unit. In this case, the division would be willing to sell the chips at a price of $78 per unit, which is equal to its variable costs plus a contribution margin of $2 per unit.

Southern Digital,Inc. The Southern Digital,Inc.produces a High-Quality Computer Chip.Unit Production Costs (Based