A company is currently manufacturing at only 60% of full practical capacity, in each of its two production departments, due to a reduction in market share. The company is seeking to launch a new product which it is hoped will recover some lost sales. The estimated direct costs of the new product, product X, are to be established from the following information:

Direct materials:

Every 100 units of the product will require 30 kilos net of Material A. Losses of 10% of materials input are to be expected. Material A costs JOD 5.40 per kilo before discount. A quantity discount of 5% is given on all purchases if the monthly purchase quantity exceeds 25,000 kilos. Other materials are expected to cost JOD 1.34 unit of product X.

Direct labor (per hundred units):

Department 1: 40 hours at JOD 4.00 per hour.

Department 2: 15 hours at JOD 4.50 per hour.

Separate overhead absorption rates are established for each production department. Department 1 overheads are absorbed at 130% of direct labor, which is based upon the expected overheads costs and usage of capacity if product X is launched. The rate in Department 2 is to be established as a rate per direct labor hour also based on expected usage of capacity. The following annual figures for Department 2 are based on full practical capacity:

Overhead: JOD 5,424,000

Direct labor hours: 2,200,000 hour

Variable overhead in Department 1 are assessed at 40% of direct wages and in Department 2 are JOD 1,980,000 (at full practical capacity). Non-production variable overhead is estimated JOD 0.70 per unit of product X. Non-production fixed overhead is estimated JOD 1.95 per unit of product X.

The selling price for product X is expected to be JOD 9.95 per unit, with annual sales of 2,400,000 units.

a. Determine the estimated cost per unit of product X.

b. Comment on the viability of product X.

c. Market research indicates that an alternative selling price for product X could be JOD 9.45 per unit, at which price annual sales would be expected to be 2,900,000 units. Determine, and comment briefly upon, the optimum selling price.