A Company Is Currently Operating at 65% Capacity Producing 12,000

question 118

Essay

A company is currently operating at 65% capacity producing 12,000 units. Cost information relating to this current production is shown in the table below.
The company has been approached by a customer with a request for a special order for 2,000 units. What is the minimum per unit sales price that management would accept for this order if the company wishes to increase current profits?
$$\begin{array} { | l | r | } \hline & \text { Per Unit } \\\hline \text { Sales price } & \$ 6 \\\hline \text { Direct material } & \$ 2.30 \\\hline \text { Direct labor } & \$ 0.87 \\\hline \begin{array} { l } \text { Variable } \\\text { overhead }\end{array} & \$ 0.91 \\\hline \text { Fixed overhead } & \$ 0.70 \\\hline\end{array}$$

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Definitions:

Mutually Exclusive

Situations or events that cannot occur at the same time, implying that the occurrence of one event excludes the occurrence of the other.

NPV

Net Present Value, a method to assess the profitability of an investment by comparing the present value of cash inflows to the present value of cash outflows.

NPV

Net Present Value is a financial measure that determines the discrepancy between the present value of money coming in and going out over a certain timeframe.

PI

Stands for Profitability Index, which measures the ratio of payoff to investment of a proposed project.