Wilderness Products, Inc., has designed a self-inflating sleeping pad for use by

Question

Wilderness Products, Inc., has designed a self-inflating sleeping pad for use by backpackers and campers. The following information is available about the new product: An investment of $1,350,000 will be necessary to carry inventories and accounts receivable and to purchase some new equipment needed in the manufacturing process. The company's required rate of return is 24% on all investments. A standard cost card has been prepared for the sleeping pad, as shown below: The only variable selling and administrative expense will be a sales commission of $9 per pad. Fixed selling and administrative expenses will be (per year): Because the company manufactures many products, no more than 38,400 direct labor-hours per year can be devoted to production of the new sleeping pads Manufacturing overhead costs are allocated to products on the basis of direct labor-hours. After marketing the sleeping pads for several years, the company is experiencing a falloff in demand due to an economic recession. A large retail outlet will make a bulk purchase of pads if its label is sewn in and if an acceptable price can be worked out. What is the minimum acceptable price for this special order? (Round your answers to 2 decimal places.)

Explanation / Answer

Stan Hours/Qty req Standard ratye Standard cost Sleeping pad produced Total VariableCost No. of sleeping pad produced 16000 Direct Material 4 2.7 10.8 172800 Direct Labour 2.4 8 19.2 307200 Variable manufacturing Overhead (1/5 of $30) 2.4 12.5 6 96000 sales Commissions 9 144000 Minimun acceptabel price per pad 45 total 720000 From 38400 direct labor hours the units can be produced 38400/2.4 16000

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