Need a bit of homework help, and I have no idea what I\'m doing. THANKS! Watches

Question

Need a bit of homework help, and I have no idea what I'm doing. THANKS!

Watches Inc. makes a watch selling for $50 per unit. Operating within its relevant range to make 200,000 watches, the unit costs are $10 for direct materials, $7 for direct labor, $5 in variable overhead and $12 in fixed costs. The company is offered a special order for 5,000 military watches that will require an additional $2 each for a special fitting.

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1. What is the incremental breakeven cost per unit for the special order?

2. What should be the special order price per watch for the company to increase its’ profits by $25,000 if it has excess capacity and is still operating within its relevant range?

A. $34 B. $24 C. $22 D. $32 E. None of the above values is correct.

Explanation / Answer

1. What is the incremental breakeven cost per unit for the special order?

DM $10 + DL $7 + VC $5 + Special Fitting $2 = $24

2. What should be the special order price per watch for the company to increase its’ profits by $25,000 if it has excess capacity and is still operating within its relevant range?

Increment cost ($10+$7+$5+$2) $24 X 5000 = $120,000
Add : Desired Profit                                              $25,000
                                                                           --------------
Total Desired Sales                                               $145,000
Total units for military order                                     5,000
Unit sales price for special order    $145,000/5000 = $29
                                                   

A. $34 B. $24 C. $22 D. $32 E. None of the above values is correct.

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