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EXERCISE 12-10 Special Order [102] At the Kicher Company's current activity level of 8,000 units per month, the costs of producing and selling one unit of the company's only product are as follows: $5.00 Direct materials Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling and administrative expenses Fixed selling and administrative expenses $6.00 $1.00 $9.00 $3.00 $4.00 P571 The normal selling price is $26 per unit. An order has been received from a potential customer overseas for 4,000 units at a price of $24.00 per unit. This order would not affect regular sales. The company's capacity is 10,000 units per month and enough excess capacity exists to fill this order Required: 1. If the order is accepted, by how much will monthly profits increase or decrease? (The order would not change the company's total fixed costs.) 2. Assume the company has 500 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? Explain 1 Exercise 12-10 2 Part 1 Total for 4,000 Units 3 Per Unit un 4 5 6 7 8 00 9 10 11 12 13 14 15 16 17 19 Part 2 20 21 The relevant cost is $3.00 (the variable selling and administrative costs). All other variable costs are sunk, since the units have already been produced. The fixed costs would not be relevant, since they would not be affected by 22 the sale of leftover units. 23 24 EXTRA: Assume that the customer's order is for 2,000 units. Variable selling expenses include a commission of $1 25 paid to Kichers' salespeople. For this special order, Kicher would not have to pay any commission since the sale 26 was being negotiated between the sales manager and the customer (e. Kicher's salespeople are not involved), 27. Safety regulations in the destination country required Kicher to include an additional part which would add $.80 of material cost per unit and $1.50 of direct labour cost per unit. Kicher would have to spend an additional $6,930 in shipping cost due to the order being overseas (this amount would be the same even if the order were 28 29 30 Total for Per Unit 2,000 Units 31 32 33 34 35 8 36 37 38 39 40 41 42 43 44 AC EXTRA: Assume the customer has decided they might need less that 2,000 units. How large does the order have to be in order for Kicher to break even on the order