Special order pricing, product mix decisions (Adapted from CMA, May 1989) Purex Company produces and sells a single product called Kleen. Annual production capacity is 100,000 machine hours. It takes 1 machine hour to produce a unit of Kleen. Annual demand for Kleen is expected to remain at 80,000 units. The selling price is expected to remain at $\$10$ per unit. Cost data for producing and selling Kleen are as follows:

Required

a. Purex Company has an inventory of 2,000 units of Kleen that were partially damaged in storage. It can sell these units through regular channels at reduced prices. These 2,000 units will be valueless unless sold this way. Sale of these units will not affect regular sales of Kleen. Compute the relevant unit cost for determining the minimum selling price for these units.

b. Ajax Company has offered to make and ship 25,000 units of Kleen directly to Purex Company's customers. If Purex Company accepts this offer, it will continue to produce and ship the remaining 55,000 units. Purex's fixed manufacturing support costs will decrease to $\$90,000$. Its fixed selling and distribution costs will remain unchanged. Variable selling and distribution costs will decrease to $\$0.80$ per unit for the 25,000 units produced and shipped by Ajax Company. Determine the maximum amount per unit that Purex Company should pay Ajax Company for producing and shipping the 25,000 units.

c. Purex Company has received a one-time special order for 5,000 units of Kleen. Acceptance of this order will not affect the regular sales of 80,000 units. Variable selling costs for each of these 5,000 units will be $\$1.00$. Determine the minimum acceptable price for Purex Company for accepting this special order.

d. Purex Company can use its current facilities to manufacture a product called Shine. Annual production capacity of Shine, which takes 2.5 machine hours per unit to produce, is 50,000 units. The marketing department estimates that 50,000 units of Shine can be sold each year at $16 per unit. Sale of Shine will not affect the demand for Kleen. Cost data for producing and selling Shine are as follows:

Determine the product mix that will maximize Purex Company's profit.

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Variable costs per unit: Direct materials Direct labor Variable manufacturing support Variable selling and distribution Fixed costs per year: Fixed manufacturing support Fixed selling and distribution $1.50 2.50 0.80 2.00 $100,000 50,000