Birmingham Corporation manufactures batons.Birmingham can manufacture 300,000 batons a year at a variable cost of $750,000 and a fixed cost of $450,000.Based on Birmingham's predictions,240,000 batons will be sold at the regular price of $5.00 each.In addition,a special order was placed for 60,000 batons to be sold at a 40 percent discount off the regular price.The unit relevant cost per unit for Birmingham's decision is

Question

Quizplus · Accepted Answer

Variable cost per baton = 750,000/300,000 = $2.50
Fixed cost per baton = 450,000/300,000 = $1.50
Total cost per baton = $2.50 + $1.50 = $4.00
Relevant cost per baton for regular sales = $4.00
Relevant cost per baton for special order = $2.50 (variable cost) + $1.50 (allocated fixed cost) = $4.00
Since the relevant cost per baton is the same for both regular sales and special order, Birmingham should accept the special order as it would generate additional revenue and contribute towards covering the fixed costs.

Birmingham Corporation Manufactures Batons