New Iberia Corporation makes and sells the "Tabasco Maiden", a wall hanging depicting a magical pepper plant. The Tabasco Maidens are sold at specialty shops for $50 each. The capacity of the plant is 15,000 Maidens per year. Costs to manufacture and sell each wall hanging are as follows:
Direct material $ 5.00
Direct labor 6.00
Variable overhead 8.00
Fixed overhead 10.00
Variable selling expenses 2.50
New Iberia Corporation has been approached by a Texas company about purchasing 2,500 Tabasco Maidens. The company is currently making and selling 15,000 per year. The Texas company wants to attach its own Lone Star label, which increases costs by $.50 each. No selling expenses would be incurred on this order. The corporation believes that it must make an additional $1 on each Tabasco Maiden to accept this offer.
a. What is the opportunity cost per unit of selling to the Texas company?
b. What is the minimum selling price that should be set?