Special-Order Pricing Decision Bob Johnson, Inc., sells a lounging chair for $25

Question

Special-Order Pricing Decision

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 for $300. Bob Johnson, Inc., has sufficient idle capacity to produce the chairs for this order.

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

Solution:

Direct Material 11

Direct Labour 7

Variable O.H 2

Total = 20.0

Company take a additional 5/- with Special Order 500 Chairs

   500 Chairs * 5 = 2,500/-

   Special Order 50 Chair each $300

   = 15,000

   Minimum Price of a Chair = Basic Cost + Additions

= 20 + 5

   = 25

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