Kimco Inc. produces a single product. The cost of producing and selling a single unit of this product at the companys normal activity level of 8,000 units per month is:
Direct materials
$2.50
Direct labour
3
Variable overhead
0.5
Fixed overhead
4.25
Variable selling and administrative expense
1.5
Fixed selling and administrative expense
2
The normal selling price is $15 per unit. The companys capacity is 10,000 units per month. An order has been received from an overseas source for 2,000 units at a price of $12 per unit. This order would not disturb regular sales.
Required:
1. If the order were accepted, by how much would monthly profits be increased or decreased?
(The order would not change the companys total fixed costs.)
2. Assume the company has 500 units of this product, which are inferior to the current model, left over from last year. The units must be sold through regular channels at reduced prices.
What unit cost figure is relevant for establishing a minimum selling price for these units? Explain.