Question

Q.1(b) A client approached to Incredible Fabricating and Manufacturing for a one-time special order for Steel doors. These Steel doors are fabricated and manufactured to local clients regularly. The cost per unit information apply for deals to regular clients: Direct materials $1,982 Direct labor 810 Variable manufacturing overhead 1.296 Fixed manufacturing overhead 2.808 Total manufacturing costs 6,896 Markup (50%) 3,348 Targeted selling price $10.244 Incredible Fabricating and Manufacturing has ample idle capacity. Required: (05 marks) a. What is the full cost of the product per unit if the marketing costs is $2,000? b. What is the contribution margin per unit? c. Which costs are relevant for making the decision regarding this one-time-only special order? Why? d. For Incredible Fabricating and Manufacturing, what is the minimum acceptable price of this one-time-only special order? e. For this one-time-only special order, should Incredible Fabricating and Manufacturing consider a price of 55,400 per unit? Why or why not?

Answer 1

Full cost includes all the product cost ie manufacturing cost such Direct , indirect, Variable , Fixed .

Product cost are the cost which incurred for producing the product and making it salable .

Marketing cost are period cost which are after production expenses , hence will no be included in product cost.

a) Full cost will be $6896 per unit

Direct Material	$1982
Direct labour	$810
Variable Manufacturing overhead	$1296
Fixed Manufacturing overhead	$2808
Total Manufacturing / Full cost of product per unit	$6896

b) Contribution margin Per unit $6156 per unit

Contribution margin is the difference of Selling and all variable cost.

Taget Selling price	$10244
Less : Variable cost of product
Direct Material	$1982
Direct Labour	$710
Variable Manufacturing overhead	$1296
Total Variable cost	$4088
Contribution Margin per unit ($10244-4088)	$6156

c) All variable cost are relevant for making special order , Fixed cost are the cost which already incurred for the given production , and there is ample capacity to produce the produce , and no external demad will be gone hence only variable cost of the product will be Relevant, as this are the cost which will be incurred for every additional unit production

Relevant cost are cost that differ between alternative product is choosen , as if special order being not consider , additional variable cost for making the product will also be avoided. Relevant cost are avoidable , or additional or opportunity cost which affect decision between two options

Direct Material	Relevant cost
Direct labour	Relevant cost
Variable Manufacturing overhead	Relevant cost
Fixed Cost	Sunk cost ( Irrelevant as already incurred)

d) Minimum acceptable price will be variable cost of manufacturing Product $4088 which will add no profit and loss and only cost of manufacturing will cover .

e) Yes, as the Price is greater than the minimum acceptable price of $4088 , any price above minimum acceptable price will add profit of (5400-4088) $1312

Please confirm the price whether it is 5400 or 55400 as it is to high comparing to normal selling price.