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Setting a Minimum Selling Price

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Landor Appliance Company makes and sells electric fans. Each fan regularly sells for $42. The following cost data per fan is based on a full-capacity of 150,000 fans produced each period.

Direct materials = $8

Direct labor = $9

Manufacturing overhead

(70% variable and 30% unavoidable fixed) = $10

A special order has been received by Landor for a sale of 25,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be $4 per fan for shipping. Landor is now selling 120,000 fans through regular channels each period. What should Landor use as a minimum selling price per fan in negotiating a price for this special order?
$28
$27
$31
$24

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Solution Summary

This solution explains how to set a special order minimum selling price when excess capacity exists.

Solution Preview

Landor would be using less than full capacity even by fulfilling its special order. (120,000 fans regularly + 25,000 fans in the special order < 150,000 fans ...

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