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Relevant cost for the special order decision

5. Crain Industries has two divisions - Standard and Deluxe. Standard manufactures the base model of Crain's product that can be sold externally or the unit may be transferred to the Deluxe division for further processing. Once the Deluxe division has completed its modifications to the Standard the product is sold to external customers for $190 per unit.

Additional cost information for the Standard and Deluxe units are provided in the table.

Standard Deluxe
Direct materials $15 $301
Direct labor 20 16
Variable overhead 30 30
Fixed overhead 25 20
Total Cost $90 $96
Not including the cost of the Standard unit

Transfers from Standard to Deluxe are at standard full cost plus 10%. The Deluxe division has received a special order for 500 units of Deluxe at $165. Assume that Crain has sufficient capacity to meet all orders. From the perspective of Crain Industries as a whole which of the following is the correct relevant cost for the special order decision?

a. $76
b. $141
c. $175
d. $186
e. $195

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Solution Summary

The solution explains how to determine the correct relevant cost for the special order decision