Trojan Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 8,000 units per year is:
|
Direct materials
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$2.50
|
|
Direct labor
|
3.00
|
|
Variable manufacturing overhead
|
.50
|
|
Fixed manufacturing overhead
|
4.25
|
|
Variable selling and administrative expense
|
1.50
|
|
Fixed selling and administrative expense
|
2.00
|
The normal selling price is $15.00 per unit. The company's capacity is 10,000 units per month. An order has been received from an overseas source for 2,000 units at the special price of $12.00 per unit. This order would not affect regular sales.
Required:
a) If the order is accepted, how much will monthly profits increase or decrease? (The order will not change the company's total fixed costs.)
b) The company has 500 units of this product left over from last year that are vastly inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? Explain.