A company is currently operating at 80% capacity producing 5,000 units. Current cost information relating to this production is shown in the table below.
$$\begin{array} { | l | c | }
\hline & \text { Per Unit } \
\hline \text { Sales price } & \$ 34 \
\hline \text { Direct material } & \$ 2 \
\hline \text { Direct labor } & \$ 3 \
\hline \begin{array} { l }
\text { Variable } \
\text { overhead }
\end{array} & \$ 4 \
\hline \text { Fixed overhead } & \$ 5 \
\hline
\end{array}$$
The company has been approached by a customer with a request for a 100 unit special order. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?

Question

A company is currently operating at 80% capacity producing 5,000 units. Current cost information relating to this production is shown in the table below. 
$$\begin{array} { | l | c | } 
\hline & \text { Per Unit } \
\hline \text { Sales price } & \$ 34 \
\hline \text { Direct material } & \$ 2 \
\hline \text { Direct labor } & \$ 3 \
\hline \begin{array} { l } 
\text { Variable } \
\text { overhead }
\end{array} & \$ 4 \
\hline \text { Fixed overhead } & \$ 5 \
\hline
\end{array}$$
The company has been approached by a customer with a request for a 100 unit special order. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?

Quizplus · Accepted Answer

The minimum price should cover the variable costs (direct material, direct labor, and variable overhead) which total $9 per unit. Fixed overhead is not considered as it is a sunk cost.

A Company Is Currently Operating at 80% Capacity Producing 5,000