PROBLEM #3 %u2013 SPECIAL ORDER Wagner Company sells Product A for $21 per unit.

Question

PROBLEM #3 %u2013 SPECIAL ORDER

Wagner Company sells Product A for $21 per unit. If Wagner operates at full production capacity of 200,000 units, its manufacturing cost per unit are as follows:

Direct materials                                                      $4.00

Direct labor                                                                5.00

Overhead, 2/3 of which is fixed                            6.00

Total                                                                      $15.00

A special order for 20,000 units was received from a foreign distributor. The foreign distributor offered $14.50 per unit. The only selling costs on this order would be $3.00 per unit for shipping. Wagner has sufficient capacity to manufacture the additional units. Fixed overhead costs would not be affected if the special order is accepted.

Required: (1) Compute the gain or loss if the customer%u2019s offer is accepted. (2) Calculate the price per unit at which the special order would generate a $20,000 profit before taxes.

Explanation / Answer

Total fixed costs = 2/3 * 6 = 4

Total variable costs = 11

Shipping cost = 3

Total cost on additional order = 14

1) Profit per unit of additional order = 14.5 - 14 = 0.5

So for 20,000 units the profit generated is 0.5 * 20,000 = $10,000

2) To generate $20,000 The profit on each unit = $1 and hence the price should be 14 + 1 = 15 where 14 is the variable costs

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.