Bob Johnson, Inc., sells a lounging chair for $25 per unit. It incurs the follow

Question

Bob Johnson, Inc., sells a lounging chair for $25 per unit. It incurs the following costs for the product: direct materials, $11; direct labor, $7; variable overhead, $2; and fixed overhead, $1. The company has received a special order for 50 chairs. The order would require rental of a special tool that rents for $300. Bob Johnson, Inc., has sufficient idle capacity to produce the chairs for this order. Required Calculate the minimum price per chair that the company could charge for this special order if management requires a $500 minimum profit on any special order.

Explanation / Answer

the costs per product would be $20. The additional rental of the special tool is $300. Add to that the $500 profit and you need to bring in a total of $800 additional.

$800 / 50 = $16

$16 + $20 = $36

So to earn an additional $500 on the special order, you need to charge $36 per chair.

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