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Special Order

The Melrose Company produces a single product, Product C. Melrose has the capacity to produce 70,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows:

Direct materials 20
Direct labor 17
Variable manufacturing overhead 13
Fixed manufacturing overhead 14
Variable selling expense 12
Fixed selling expense 8

The regular selling price of one unit of Product C is 100. A special order has been received by Melrose from Moore Company to purchase 7,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special order. The machine will cost 10,500 and will have no use after the special order is filled.
Reference: 13-13

Assume that Melrose expects to sell 60,000 units of Product C to regular customers next year. At what selling price for the 7,000 units would Melrose be economically indifferent between accepting and rejecting the special order from Moore?


Solution Preview

The variable cost of production is

Direct materials 20
Direct labor 17

Solution Summary

The solution explains how to calculate the indifference price between accepting or rejecting a special order