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Easton Company has a capacity to produce 75,000 computer monitors per year. The company is currently producing and selling 58,000 monitors per year at
Easton Company has a capacity to produce 75,000 computer monitors per year. The company is currently producing and selling 58,000 monitors per year at a selling price of $450 per monitor. The cost of producing and selling one monitor at the 58,000 unit level of activity is given in the table below: Direct Material cost Direct Labor cost Variable manufacturing cost Fixed manufacturing cost Variable selling and administrative cost (including sales commission) Fixed selling and administrative cost Total cost per unit SSSS $ 70 60 $ 48 52 $ 69 57 $ 69 $ 58 345 The company has received a special order for 12,000 monitors at a unit price of $250. The company does not have to pay sales commission to the salesmen for the special order. Currently, the company pays a sales commission of $30 per monitor to its salesmen. The special order will have no effect on its fixed costs. The marketing manager has rejected the special order based on the following computation: Special order price Cost per monitor 69 250 Less: sales commission avoided Cost per monitor for the special order Net loss per monitor for the special order Required: $ $ 345 30 $ 315 $ (65) a) You are reviewing the marketing manager's decision. What would you do? Would you accept or reject the order? Show computations to support your decision, especially the impact on company's profits from the special order(4 points). b) Regardless of what you answered in part (a), what is the minimum acceptable price for the special order? (2 points) c) Suppose the firm is selling 70,500 monitors currently. If the company wants to accept the special order, what is the minimum acceptable price? Assume that the cost structure given for an actitivy level of 58,000 monitors is applicable at this level of activity as well (4 points).
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