Situation Two

Xenon Corp. produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 59,850 units per month is as follows: Direct material $71.80

Direct labor 16.65

Variable manufacturing overhead 4.65

Fixed manufacturing overhead 22.60

Variable selling and administrative expense 6.65

Fixed selling and administrative expense 17.30 Total $139.65

The normal selling price of the product is $167.60 per unit.

An order has been received from an overseas customer for 9,300 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $4.00 less per unit on this order than on normal sales. Direct labor is a variable cost in this company.

Required:

1. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $131.70 per unit. By how much would this special-order increase (decrease) the company's net operating income for the month?

2. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

3. Suppose there is not enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 9,300 units for regular customers. What would be the minimum acceptable price per unit for the special order?

4. What is the advantage(s) to Xenon Corp. of foregoing manufacture of the product for sales by Xenon and instead manufacturing for sales by other companies?

5. What are the dangers of the strategy mentioned in Question 4?