9. 9. The Varone Company makes a single product called a Hom. The company has th

ID: 2599852 • Letter: 9

Question

9. The Varone Company makes a single product called a Hom. The company has the capacity to produce 43,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are; Direct materialsiat $20 $10 Direct labor Fixed manufacturing overhead Variable selling expense Fixed selling expense The regular selling price for one Hom is $60. A special order has been received from the Fairview Company to purchase 8,000 Homs next year. For this special order, the variable selling expense would be reduced by 20%. 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 $12.000 and it would have no use after the special order was filled If Varone can expect to sell 34,000 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? (Choose the closest answer) A. $42.50 B. $43.70 C. $39.90 D. $42.90 E $41.40

Explanation / Answer

Answer = $42.9

It is mentioned that for this special order the variable selling expense will be reduced by 20% so New Variable selling expense is $6.4 ($8 – 20%)

We all know that Fixed Expenses will not change with increase or decrease in Production or sales, So Fixed Manufacturing expenses and fixed expenses will not change.

So they will incur irrespective whether we accept the order or not. So we will not consider fixed cost as they will not affect the decision.

Product cost:-

Direct Material cost (8000 Units * $20)

160,000

Direct Labor (8000 Units * $10)

80,000

Variable manufacturing overhead (8000 Units * $5)

40,000

Variable Selling expenses (8000 Units * $6.4)

51,200

Machine cost

12,000

Total cost

343,200

No. of Units

8,000

Cost per unit

$42.9