Costs for Product Y

Direct material $90

Direct labor 45

Variable Factory Overhead 35

Variable Selling Costs 5

Fixed Factory Overhead* 30

Fixed Selling Costs* 10

Total Cost per unit $215

*Reflects common (allocated) costs that will not change with special order

Capacity = 200,000 units, currently producing 120,000 units

The normal selling price per unit = $250

The special order: A customer outside the normal market offers to purchase 60,000 units of Product Y. Variable selling costs will be avoided with the special order.

1. Does the firm have the excess capacity to meet the special order?
2. What are the relevant costs for Product Y when considering the special order?
3. Should the firm accept the special order if the customer is willing to pay $180 per unit for Product Y? If the order is accepted, what would be the incremental profit (loss)?
4. What are the relevant costs if this order involves a special label and packaging for Product Y? The special labeling will require a new $120,000 machine (only to be used on this order) and a variable cost of $5 per unit for the materials needed for the label. The special packaging will add an additional $5 of cost to the product.

5. Considering the information in (4) above, should the firm accept the special order at a price of $180?
6. What is the minimum price that the firm could accept for the special order of Product Y when considering the information in (4) above?