Question
Fazz Electronics Inc. has been approached by a new customer who wants to place a one-time order for a component similar to one that Fazz
Fazz Electronics Inc. has been approached by a new customer who wants to place a one-time order for a component similar to one that Fazz makes for another customer. Existing sales will not be affected by acceptance of this order. Fazz has a policy of setting its targeted selling price of 60 percent over full manufacturing cost. The manufacturing costs and the targeted selling price for the component currently being made are as follows:
Direct materials $ 2.30
Direct labour 3.60
Variable manufacturing overhead (75% of direct labour cost) 2.70
Fixed manufacturing overhead (150% of direct labour cost) 5.40
Total manufacturing cost 14.00
Markup (60% of full manufacturing cost) 8.40
Targeted selling price $ 22.40
Fazz has excess capacity to produce the quantity of the component desired by the new customer. The direct materials used in the component for the new customer would cost the manufacturer $0.25 less than those in the component currently being made. The variable selling expenses, associated with packaging and shipping, would be the same as for the component currently being made, $0.90 per unit.
Required: What is the minimum unit price at which Fazz would be willing to accept the special order?
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