Panyer Co. is a producer of a tank component. This product, J-5, has the following selling price and costs per unit:
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Panyer Co. is a producer of a tank component. This product, J-5, has the following selling price and costs per unit:

Selling price

$300

Direct materials

125

Direct labor

25

Variable manufacturing overhead

50

Shipping and handling

5

Fixed manufacturing overhead

15

Fixed selling and administrative

10

Total costs

$230

Panyer has again received a special, one-time offer for 2,000 units of J-5. Panyer is now operating at full capacity, 10,000 units, at a total cost of $2,300,000. To produce this order would cause a 20% increase in fixed costs. What is the minimum price that is acceptable for this one-time, special order?

$205$260$230$300Show Result

Correct - Your answer is correct.

Wrong - Your answer is wrong.

Detailed Answer

Answer (C) is correct. To determine the minimum price per unit, while at full capacity, the differential costs must be found. The total cost of producing 12,000 units is $2,760,000 {(12,000 units × $205 variable cost) + [(10,000 units × $25 fixed cost) × 1.2]}. Thus, the total differential cost is $460,000 ($2,760,000 – $2,300,000), and the unit differential cost is $230 ($460,000 ÷ 2,000 units).