QUESTION 3

Special Order [L02]

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:

Direct materials$2.50

Direct labour$3.00

Variable manufacturing overhead$0.50

Fixed manufacturing overhead$4.25

Variable selling and administrative expenses$1.50

Fixed selling and administrative expenses$2.00

The normal selling price is $15 per unit. The company's capacity is 10,000 units per month. An order has been received from a potential customer overseas for 2,000 units at a price of $12.00 per unit. This order would not affect regular sales.

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.