Question

Wagner company sells product a for $21 per unit. wagner's unit product cost based on the full capacity of 200,000 units is as follows: direct materials $4 direct labour $5 manufacturing overhead $6 unit product cost $15 a special order offering to buy 20,000 units has been received from a foreign distributor. the only selling costs that would be incurred on this order would be $3 per unit for shipping. wagner has sufficient idle capacity to manufacture the additional units. two-thirds of the manufacturing overhead is fixed and would not be affected by this order. assume that direct labour is an avoidable cost in this decision. in negotiating a price for the special order, what should be the minimum acceptable selling price per unit?

a. $14
b. $15
c. $16
d. $18

Answer 1

The minimum acceptable selling price per unit for the special order, considering avoidable costs and excluding fixed costs that are not affected by the order, is $14. This price would allow Wagner to cover relevant costs and make a profit on the additional units sold.

Step-by-step explanation:

To calculate the minimum acceptable selling price per unit for the special order, we should consider the avoidable costs. Direct materials ($4), direct labor ($5), and the variable portion of manufacturing overhead are relevant in this case. Since two-thirds of the manufacturing overhead is fixed, only one-third of the $6 is variable and relevant, which is $2 per unit. Adding the shipping costs of $3 per unit, the total avoidable cost per unit becomes $4 + $5 + $2 + $3 = $14. This is the cost that Wagner would save if it didn't accept the special order, so any price above $14 would contribute positive margin to cover the fixed costs and add to profits.