Problem (Algorithmic)
Relevant costs; special order pricing
Kantrovitz Company is a manufacturer of industrial components. One of its products, AP110, is used as a subcomponent in appliance manufacturing. This product has the following information per unit:
|
Selling price
|
$
|
167
|
|
Costs:
|
|
Direct material
|
$
|
30
|
|
Direct labor
|
20
|
|
Variable manufacturing overhead
|
12
|
|
Fixed manufacturing overhead
|
29
|
|
Shipping and handling
|
3
|
|
Fixed selling and administrative
|
14
|
|
Total per-unit cost
|
$
|
108
|
a. Kantrovitz has received a special, one-time order for 1,300 AP110 parts. Assuming Kantrovitz has excess capacity, what is the minimum price that is acceptable for beginning negotiations on this order?
b. Kantrovitz has 4,650 units of AP110 in inventory that have some defects. The units cannot be sold through regular channels without a significant price reduction. What per-unit cost figure is relevant for setting a minimum selling price on these units?
c. During the next year, sales of AP110 are expected to be 10,700 units. All costs will remain the same except that fixed manufacturing overhead will increase by 30 percent and direct material will increase by 10 percent. The selling price per unit for next year will be $180. Based on these data, calculate the total contribution margin generated by part AP110.
d. Referring to (a), Kantrovitz has received a special, one-time order for 1,300 AP110 parts. Assume that Kantrovitz is operating at full capacity, and that the contribution of the output would be displaced by the one-time special order. Using the original data, compute the minimum acceptable selling price for this order.