Question

Required information

[The following information applies to the questions displayed below.]

Badger Valve and Fitting Company, located in southern Wisconsin, manufactures a variety of industrial valves and pipe fittings that are sold to customers in nearby states. Currently, the company is operating at about 70 percent capacity and is earning a satisfactory return on investment. Management has been approached by Glasgow Industries Ltd. of Scotland with an offer to buy 170,000 units of a pressure valve. Glasgow Industries manufactures a valve that is almost identical to Badger’s pressure valve; however, a fire in Glasgow Industries’ valve plant has shut down its manufacturing operations. Glasgow needs the 170,000 valves over the next four months to meet commitments to its regular customers. Glasgow is prepared to pay $40.50 each for the valves. Badger’s total product cost, based on current attainable standards, for the pressure valve is $42.00, calculated as follows:

Direct material	$	11.50
Direct labor		13.00
Manufacturing overhead		17.50
Total product cost	$	42.00

Manufacturing overhead is applied to production at the rate of $25 per standard direct-labor hour. This overhead rate is made up of the following components.

Variable manufacturing overhead	$	8.00
Fixed manufacturing overhead (traceable)		12.00
Fixed manufacturing overhead (allocated)		5.00
Applied manufacturing overhead rate	$	25.00

Additional costs incurred in connection with sales of the pressure valve include sales commissions of 5 percent and freight expense of $1.50 per unit. However, the company does not pay sales commissions on special orders that come directly to management. In determining selling prices, Badger adds a 30 percent markup to total product cost. This provides a $54.60 suggested selling price for the pressure valve. The Marketing Department, however, has set the current selling price at $53.10 in order to maintain market share. Production management believes that it can handle the Glasgow Industries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $17,000 per month in the form of supervision and clerical costs. If management accepts the order, 42,500 pressure valves will be manufactured and shipped to Glasgow Industries each month for the next four months. Glasgow’s management has agreed to pay the shipping charges for the valves.

3. Calculate the minimum unit price that Badger Valve and Fitting Company’s management could accept for the Glasgow Industries order without reducing net income. (Round your answer to 2 decimal places.)

Minimum Unit Price

Answer 1

Solution

Badger Valve and Fitting Company

Determination of the minimum unit price that Badger should accept for the Glasgow’s order without reducing net income:

The minimum unit price should comprise unit variable cost as well as additional fixed cost.

Minimum Unit Price
Variable Costs
Direct Materials	$11.50
Direct Labor	$13.00
Variable overhead	$8.00
Total variable costs	$32.50
Fixed cost ($68,000/170,000)	$0.40
Minimum Unit Price	$32.90

Other factors to be considered –

1. The impact of Glasgow’s special order on Badger’s regular sales.
2. Badger’s relevant range of activity and the company’s production capacity to meet the special order.