Question
The Varone Company makes a single product called a Hom. The Company has the capacity to produce 40,000 Homs per year. Per unit costs to
The Varone Company makes a single product called a Hom. The Company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are:
Direct Materials..........................................$20
Direct Labor...............................................$10
Variable Manufacturing Overhead................$ 5
Fixed Manufacturing Overhead...................$ 7
Variable Selling Expense...........................$ 8
Fixed Selling Expense..............................$ 2
The regular selling price for one Hom is $ 60. A special order has been received from the Fairview Company to purchase 8,000 Homs next year. For this special order, the variable selling expense would be reduced by 25%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $12,000 and it would have no use after the special order was filled.
If Varone can expect to sell 34,000 Hom next year through regular channels, at what special order price from Fairview should Varone be economically indifferent between either accepting or not accepting this special order?
A) $ 51.00
B) $ 48.20
C) $ 42.50
D) $ 39.60
E) $ 46.75
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