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Minimum price for order

Shorewood Shoes Company makes and sells a variety of leather shoes for children. For its current mix of different models and sizes, the average selling price and costs per pair of shoes are as follows:

Item
Price $20
Costs:
Direct materials $6
Direct labor 4
Variable manufacturing support 2
Variable selling support 1
fixed Support 3
Total costs 16

Shoes are manufactured in batch sizes of 100 pairs. Each batch requires 5 machine hours to manufacture. The plant has a total capacity of 4,000 machine hours per month, but current month production consumes only about 80% of the capacity.

A discount store has approached Shorewood to buy 10,000 pairs of shoes next month. It has requested that the shoes bear its own private label. Embossing the private label will cost Shorewood an additional $.50 per pair. However, no variable selling support cost will be incurred for this special order.

Determine the minimum price that Shorewood Shoes should charge for this order. What other considerations are relevant in this decision?

Solution Preview

The capacity is 4,000 machine hours per month and is being used 80%. This implies that 4,000 X 20% = 800 machine hours are excess. In 800 hours, 800/5 = 160 batches X 100 = 16,000 pairs can be made. ...

Solution Summary

The solution explains how to calculate the minimum price for order

$2.19