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

question 190

Essay

A company is currently operating at 65% capacity producing 12,000 units. Cost information relating to this current production is shown in the following table:
$$\begin{array} { | l | r | } \hline & \text { Per Unit } \\\hline \text { Sales price } & \$ 6.00 \\\hline \text { Direct material } & \$ 2.30 \\\hline \text { Direct labor } & \$ 0.87 \\\hline \text { Variable overhead } & \$ 0.91 \\\hline \text { Fixed overhead } & \$ 0.70 \\\hline\end{array}$$ 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?

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Definitions:

Mixed Cost

A cost that contains both variable and fixed cost elements; it changes with the level of activity but not in direct proportion.

Least-squares Regression

A statistical method used to determine the line of best fit by minimizing the squares of the differences between observed and predicted values.

Variable Manufacturing Cost

Costs that vary directly with the level of production output, such as raw materials and labor.

Production Volume

The amount of products or services generated by a business over a particular time frame.