Kava Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as K65. Data concerning this product are given below: The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered to be a variable cost.
-The company has received a special, one-time-only order for 500 units of component K65. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. Assuming that Kava has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go?

Question

Kava Inc. manufactures industrial components. One of its products, which is used in the construction of industrial air conditioners, is known as K65. Data concerning this product are given below:  The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered to be a variable cost.
-The company has received a special, one-time-only order for 500 units of component K65. There would be no variable selling expense on this special order and the total fixed manufacturing overhead and fixed selling and administrative expenses of the company would not be affected by the order. Assuming that Kava has excess capacity and can fill the order without cutting back on the production of any product, what is the minimum price per unit on the special order below which the company should not go?

Quizplus · Accepted Answer

To determine the minimum price per unit on the special order below which the company should not go, we need to calculate the incremental cost per unit of producing the 500 units of component K65.

Direct materials per unit: $42
Direct labor per unit (variable cost): $14
Variable manufacturing overhead per unit: $22
Incremental cost per unit: $42 + $14 + $22 = $78

Therefore, the minimum price per unit on the special order should be at least $78.

Option A is incorrect as it is less than the incremental cost per unit.
Option C and D are incorrect as they are higher than the incremental cost per unit.

Hence, option B is the best choice as it is equal to the incremental cost per unit.

Kava Inc Manufactures Industrial Components