The following are Silver Corporation\'s unit costs of making and selling an item

Question

The following are Silver Corporation's unit costs of making and selling an item at a volume of 10,100 units per month (which represents the company's capacity):

Present sales amount to 7,800 units per month. An order has been received from a customer in a foreign market for 2,300 units. The order would not affect regular sales. Total fixed costs, both manufacturing and selling and administrative, would not be affected by this order. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume that direct labor is a variable cost.

Assume the company has 65 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company's other sales. Which of the following costs is relevant in this decision?

Manufacturing: Direct materials $ 2.30 Direct labor $ 3.30 Variable overhead $ 1.80 Fixed overhead $ 0.50 Selling and administrative: Variable $ 3.30 Fixed $ 0.90

Explanation / Answer

Minimum required selling price per unit for special order:

minimum price will be= 10.70

and for defective units only incremental costs are considered which is variable sellling expenses of 3.3 per unit will be the minimum selling price per unit per defective unit. because only relevant incremental costs are considered.

Particulars special order Per unit Total Variable expenses: Direct materials               2.30           5,290.00 Direct labor               3.30           7,590.00 Overhead             1.800           4,140.00 selling expenses             3.300           7,590.00 Total (A)             10.70        24,610.00

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