A mail-order confectioner sells fine candy in one-pound boxes. It has the capacity to produce 600,000 boxes annually, but forecasts that it will produ... Accounting MCQs | Accounting MCQs

A mail-order confectioner sells fine candy in one-pound boxes. It has the capacity to produce 600,000 boxes annually, but forecasts that it will produce and sell only 500,000 boxes in the coming year. The costs to manufacture and distribute the candy are detailed below. The organization has invested capital of $6,750,000.

Variable costs per pound:

Manufacturing

$4.85

Packaging

0.35

Distribution

1.80

Total

7.00

Annual fixed costs:

Manufacturing overhead

$810,000

Marketing and distribution

270,000

The confectioner has been asked by a retailer to submit a bid for a special order of 40,000 one-pound boxes of candy; this is a one-time order that will not be repeated. While the candy would be almost identical, the candy ingredients would be $0.45 less. The total distribution costs for the entire order would be $32,000. Special setup costs required by this order would amount to $60,000. There would be no other changes in costs, rates, or amounts. The minimum selling price per one-pound box that the confectioner would bid on this special order would be

$7.05$8.85$9.05$9.55Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (A) is correct. The minimum selling price equals the incremental costs of the special order (variable manufacturing costs, variable packaging costs, distribution costs, and setup costs) divided by the units ordered. The fixed costs do not change because the manufacturer has excess capacity. Total variable manufacturing costs are $190,000 [40,000 × ($4.85 – $.45 + $.35)], distribution costs are $32,000, and setup costs are $60,000. Thus, the minimum unit price is $7.05 [($190,000 + $32,000 + $60,000) ÷ 40,000]