The Sommers Company manufactures a variety of industrial valves. Currently, the company is operating at about 70% capacity and is earning a satisfactory return on investment. Management has been approached by Glascow Industries Ltd. of Scotland with an offer to buy 120,000 units of a pressure valve. Glascow manufactures a valve that is almost identical to Sommers’ pressure valve; however a fire in Glascow Industries’ valve plant has shut down its manufacturing operations. Glascow needs the 120,000 valves over the next 4 months to meet commitments to its regular customers; the company is prepared to pay $19 each for the valves FOB shipping point Sommers’ product cost based on current attainable standards, for the pressure valve is as follows:
Manufacturing overhead is applied to production at the rate of $18 per standard direct labor hour. This overhead rate is made up of the following components:
|Variable factory overhead
|Fixed factory overhead-direct
|Fixed factory overhead-allocated
|Applied manufacturing overhead rate
In determining selling prices, Sommers adds a 40% markup to product cost. This provides a $28 suggested selling price for the pressure valve. The Marketing Department, however, has set the current selling price at $27 to maintain market share. Production management believes that it can handle the Glascow Industries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs. If management accepts the order, 30,000 pressure valves will be manufactured and shipped to Glascow Industries each month for the next 4 months. Shipments will be made in weekly consignments, FOB shipping point.
What is the minimum unit price that Sommers could accept without reducing net income?