Reyesville Company produces a single product. The cost of producing and selling

Question

Reyesville Company produces a single product. The cost of producing and selling a single unit of this product at the company' s capacity level of 70, 000 units per month is as follows:

Direct materials $26.60 per unit

Direct labor 4.30

Variable manufacturing overhead 1.90

Fixed manufacturing overhead 11.10

Variable selling and administrative expense. 1.50

Fixed selling and administrative 9.10

The normal selling price of the product is $56.70

An order has been received from an overseas customer for 2000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.70 less per unit on this order than on normal sales.

a) Suppose there is aspen ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $51.20 per unit. By how much would this specialnorder increase (decrease) the company's net operating income for the month?

b) Suppose the company is already operating at capacity when the special order is recieved fromthe overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

C) Suppose Reyesville is currently selling 68,750 units to local customers in order to satisfy the special overseas order, What would be the minimum acceptable price per unit for the special order?

Explanation / Answer

Answer 1:

RELEVENT COST RELEVENT REVENUES

DM $26.60 51.2

DL 4.30

MOH V 1.90

V Selling& admin .70 -

===========

$33.5 51.2

IN 2000

RELVENT COST = 2000*33.5 = 67000

RELEVENT RELE = 2000*51.2 = 102400

SO ACCEPTED

IF WE ACCEPTED THIS ORDER THE REVENUES WILL INCREASED BY 102400-67000

= 35400

ORIGINAL PRICE = 56.70

-

NEW PRICE = 51.20

=OPPORTU COST PER UNIT =56.7-51.2 = 5.5

TOTAL OPPOR UNITY COST =5.5*2000 = 11000

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