Purple Trees manufactures rustic furniture.The cost accounting system estimates manufacturing costs to be $240 per table,consisting of 60% variable costs and 40% fixed costs.The company has surplus capacity available.It is Purple Trees' policy to add a 75% markup to full costs. Purple Trees is invited to bid on a one-time-only special order to supply 100 rustic tables.What is the lowest price Purple Trees should bid on this special order?

Question

Quizplus · Accepted Answer

To determine the lowest price Purple Trees should bid on the special order, we need to calculate the total cost to produce 100 rustic tables.

Variable cost per table = 60% x $240 = $144

Fixed cost per table = 40% x $240 = $96

Total cost per table = $144 + $96 = $240

Total cost to produce 100 tables = $240 x 100 = $24,000

To determine the minimum price to bid, we need to add a 75% markup to the full cost:

Minimum price to bid = $24,000 x 1.75 = $42,000

Therefore, the minimum price that Purple Trees should bid on this special order is $14,400 (i.e. $24,000 x 1.75 x 100/300). Bidding any lower would result in a loss.

Purple Trees Manufactures Rustic Furniture