The Varone Company makes a single product called a Hom. The company has the capa
ID: 2492245 • Letter: T
Question
The Varone Company makes a single product called a Hom. The company has the capacity to produce 48,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are: Direct materials $40 Direct labor $30 Variable manufacturing overhead $25 Fixed manufacturing overhead $7 Variable selling & administrative expense $28 Fixed selling & administrative expense $7 The regular selling price for one Hom is $160. A special order has been received at Varone from the Fairview Company to purchase 10,000 Homs next year at 15% off the regular selling price. If this special order were accepted, the variable selling expense would be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $14,000 and it would have no use after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 36,000 to 48,000 Homs per year. Assume direct labor is a variable cost. If Varone can expect to sell 32,000 Homs next year through regular channels, at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order? (Round your answer to two decimal places.) $124.40
Explanation / Answer
Since fixed cost is constant within the range of 36000 to 48000 homs, fixed cost need not be considered to take the decision whether to accept or reject the special offer.
Indifferent price is the price where the additional cost incurred equals the revenue.
Cost per unit :
Direct Material $40
Direct Labor $30
Variable Manufacturing Overhead $25
Variable Selling & Administrative Expense $28
Total Variable Cost $123
Total Variable Cost = $123 * 10000 = $1230000
Specialised Machine Cost = $14000
Total Cost $1244000
Indifferent Price = Cost
Units * Selling Price = Cost
10000 * Selling Price = $1244000
Selling Price = $124.40
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