The Mighty Music Company produces and sells a desktop speaker for $100.The company has the capacity to produce 50,000 speakers each period.At capacity,the costs assigned to each unit are as follows: $\begin{array}{lrr}
\text { Unit level costs } & \$ 45 \
\text { Product level costs } & \$ 15 \
\text { Facility level costs } & \$ 5
\end{array}$ The company has received a special order for 500 speakers.If this order is accepted,the company will have to spend $15,000 on additional costs.Assuming that no sales to regular customers will be lost if the order is accepted,at what selling price will the company be indifferent between accepting and rejecting the special order?
A) $95
B) $45
C) $75
D) $60

Question

The Mighty Music Company produces and sells a desktop speaker for $100.The company has the capacity to produce 50,000 speakers each period.At capacity,the costs assigned to each unit are as follows: $\begin{array}{lrr}
\text { Unit level costs } & \$  45 \
\text { Product level costs } & \$  15 \
\text { Facility level costs } & \$  5
\end{array}$ The company has received a special order for 500 speakers.If this order is accepted,the company will have to spend $15,000 on additional costs.Assuming that no sales to regular customers will be lost if the order is accepted,at what selling price will the company be indifferent between accepting and rejecting the special order?
A) $95
B) $45
C) $75
D) $60

Quizplus · Accepted Answer

The cost per unit at capacity is $66 ($38+$19+$9). Adding the $15,000 in additional costs for the special order, the total cost of producing 500 units is $50,000 (($38 + $19 + $9) x 500 + $15,000).

To calculate the minimum selling price for the special order, we need to find out the contribution margin per unit, which is equal to the selling price minus the variable cost per unit. The variable cost per unit is $28 ($19+$9) at capacity. Thus, the contribution margin per unit is $72 ($100 - $28).

With a total cost of $50,000 and a contribution margin of $72 per unit, the company needs to sell 694 units at $75 each ($72 x 694 = $49,968) to break even on this special order. Therefore, the selling price of $75 per unit would make the company indifferent between accepting and rejecting the special order.

The Mighty Music Company Produces and Sells a Desktop Speaker