Integrated Masters, Inc. (IMI), is presently operating at 80% of capacity and ma

Question

Integrated Masters, Inc. (IMI), is presently operating at 80% of capacity and manufacturing 121,000 units of a patented electronic component. The cost structure of the component is as follows:    
  

  

An Italian firm has offered to purchase 20,100 of the components at a price of $24.5 per unit, FOB IMI's plant. The normal selling price is $32.3 per component. This special order will not affect any of IMI's "normal" business. Management calculated that the cost per component is $23.3, so it is reluctant to accept this special order.

Required:

a. Calculate the fixed overhead per unit? (Round your answer to 2 decimal places.)

b. Is the cost calculation appropriate?

c. Should the offer from the Italian firm be accepted?

Raw materials $ 6.10 per unit Direct labor 6.10 per unit Variable overhead 8.10 per unit Fixed overhead $ 363,000 per year

Explanation / Answer

a Fixed overhead per unit = 363000/121000= $3 per unit b NO, the cost calculation is not appropriate, as fixed overhead per unit should not be included in cost calculation. c Total relevant cost = 6.1+6.1+8.1 = $20.3 The offer should be accepted as relevant cost is less than order price of $24.5

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