Special Order Problem

Delta Screen Corporation is currently operating at 60% of capacity and producing 6,000 screens annually.The normal selling price is $750 per screen.They recently received an offer from a company in Germany to purchase 2,000 screens for $500 per unit.The order must be taken in its entirety or not at all.Delta has not previously sold products in Germany.Budgeted production costs for 6,000 and 8,000 screens follow:

Units Produced6,0008,000

Direct Materials Cost$750,000$ 1,000,000

Direct Labor Cost750,0001,000,000

Overhead Cost2,100,000 2,400,000

Total Cost3,600,0004,400,000

Full Cost per Unit600 550

Delta's marketing manager believes that although the price offered by the German customer is lower than current price, the order should be accepted to gain a foothold in the German market.The production manager, however, believes that the order should be rejected because the unit cost is higher than the price offered.

1)What is the variable cost of producing one screen?

DM cost is completely variable and costs $125 per screen.

DL cost is completely variable and costs $125 per screen.

However, overhead is a mixed cost.The total cost changes from 6,000 to 8,000 units of production so it is not a fixed cost.Additionally, the per unit cost decreases from $350 per unit with 6,000 units to $300 per unit with 8,000 units - so it is not a variable cost.

Use High/Low Method to calculate fixed and variable potions of MOH:

($2,400,000 - $2,100,000) / (8,000 - 6,000) = $150 VC MOH per Screen

TC = FC + VC * Activity Level

$2,100,000 = FC + $150 * 6,000 units

FC = $1,200,000

Therefore, total VC = $125 of DM + $125 of DL + $150 of Variable MOH = $400 VC per screen.

Where does "Additionally, the per unit cost decreases from $350 per unit with 6,000 units to $300 per unit with 8,000 units" found in the equation?

Where is $150 VC MOH per Screen?