Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Reggie Ltd.'s capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order.
If Reggie Ltd. wants to increase its profit by £18,000 on the special order, what is the minimum price it should charge per unit?

A) £4,014
B) £4,164
C) £5,100
D) £6,900

Question

Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Reggie Ltd.'s capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order.
If Reggie Ltd. wants to increase its profit by £18,000 on the special order, what is the minimum price it should charge per unit?

A) £4,014 
B) £4,164 
C) £5,100 
D) £6,900

Quizplus · Accepted Answer

First, we need to calculate the total cost to produce 100 extra units:

Direct materials: £1,500 (3 x £500)
Direct labor: £1,800 (3 x £600)
Variable overhead: £900 (3 x £300)
Fixed overhead: £2,400 (3 x £800)

Total cost: £6,600

Now, we need to add the desired profit of £18,000 to the total cost:

Total cost + Desired profit = Minimum price x Number of units

£6,600 + £18,000 = Minimum price x 100

Minimum price = (£6,600 + £18,000) / 100

Minimum price = £24,600 / 100

Minimum price = £246

However, we need to add the dealer's commission of £1,800:

Minimum price + Dealer's commission = Selling price

£246 + £1,800 = £2,046

Therefore, the minimum price Reggie Ltd. should charge per unit is £2,046, which is closest to choice B (£4,164).