The Immanuel Company has just obtained a request for a special order of 6,000 ji
ID: 2473794 • Letter: T
Question
The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is:
Variable production cost
$4.60
Fixed production cost
$1.80
Variable selling expense
$1.00
If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit. Total fixed production cost would not be affected by this order. At what selling price per unit should Immanuel be indifferent between accepting or rejecting the special offer?
A: $7.40
B: $7.70
C: $6.40
D: $4.90
Variable production cost
$4.60
Fixed production cost
$1.80
Variable selling expense
$1.00
Explanation / Answer
Selling price per unit = Variable production cost + shipping cost per unit
= $4.60 + 0.30
= $4.90 p.u. i.e. option D
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