Accounting - Special Orders Question?

Bob Johnson, Inc., sells a lounging chair for $25 per unit. It incurs the following costs for the product: direct materials, $11; direct labor, $7; variable overhead, $2; and fixed overhead, $1.

The company has received a special order for 50 chairs. The order would require rental of a special tool that rents for $300. Bob Johnson, Inc., has sufficient idle capacity to produce the chairs for this order.

Required

Calculate the minimum price per chair that the company could charge for this special order if management requires a $500 minimum profit on any special order.

I added up the costs to make one chair and got $21 dollars. Then I

multiplied 21 x 50 chairs = 1050. Then I added 300 special tools + 500

minimum profit + 1050 and got 1850. I then divided this number by 50

chairs and got 37. I don't know why this isn't the correct answer

because 1850-1050 = 800 Then 800 - 300 tools = 500 profit.

can someone please help

2 Answers

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  • JKRB
    Lv 7
    9 years ago
    Favorite Answer

    Since there is sufficient idle capacity to produce the special order, you should not include fixed costs. So all you need to do is write out a break-even formula that includes the $300 for the special tool and the $500 minimum profit that is required.

    (20 x 50) + 300 + 500 = 50x

    x = $36 per chair

  • 9 years ago

    You need to consider only relevant costs and revenues as follows:

    Minimum Profit $500

    Variable Costs (11 + 7 + 2)x 50 $1,000

    Additional Special Tool Rent $300

    Required Sales Revenue $1,800

    Selling Price per unit = $1,800/50 = $36 per chair

    Source(s): academiamentoring yahoo group
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