Relevant-cost approach to short-run pricing decisions. (20-30 minutes) Alexon, SL, is an electronics business with eight product lines.

Profit data for one of the products (XT-107) for the month just ended June 2000) are as follows: lop2

Xucla Mecaniques Fluvia, SA, an instruments company, has a problem with its preferred supplier of XT-107 component products. This supplier has had a 3-week labour strike and will not be able to supply Xucla 3,000 units next month. Xucla approaches the sales representative, Angela Zamora, of Alexon, SL, about providing 3,000 units of XT-107 at a price of EUR 80 per unit. Zamora informs the XT-107 product manager, Francisco Garcia-Salve, that she would accept a flat commission of EUR 6,000 rather than the usual 15% if this special order were accepted. Alexon has the Capacity to produce 300,000 units of XT-107 each month, but demand has not exceeded 200,000 units in any month in the last year.
REQUIRED 1. If the 3,000-unit order from Xucla is accepted, what will be the effect on monthly operating profit? (Assume the same cost structure as occurred in June 2000.)
Garcia-Salve ponders whether to accept the 3,000-unit special order. He is afraid of the precedent that might be set by cutting the price. He says,’The price is below our full cost of EUR 95 per unit. I think we should quote a full price, or Xucla will expect favoured treatment again and again if we continue to do business with them. Do you agree with Garcia-Salve? Explain.

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Sales, 200,000 units at average price of EUR 100 Variable costs Direct materials at EUR 35 per unit EUR 7,000,000 Direct manufacturing labour at EUR 10 per unit EUR 20,000,000 2,000,000 Variable manufacturing overhead at EUR 5 per unit 1,000,000 Sales commissions at 15% of sales 3,000,000 Other variable costs at EUR 5 per unit Total variable costs Contribution margin Fixed costs Operating profit 1,000,000 14,000,000 6,000,000 5,000,000 EUR 1,000,000