Question

6. 7Leaves Café manufactures coffee tables. 7Leaves Café has a policy of adding a 10% markup to full costs and currently has excess capacity. The following information pertains to the company's normal operations per month: units Output Machine-hours Direct manufacturing labor-hours 20,000 tables 6000 hours 14,000 hours $140 $20 $360,000 $1,300,000 $100,000 $1,00,000 20X14000- Direct materials Direct manufacturing labor per hour Variable manufacturing overhead costs Fixed manufacturing overhead costs Product and process design costs Marketing and distribution costs per unit 20000 Leaves Café is approached by an overseas customer to fulfill a one-time-only special rder for 5000 units. All cost relationships remain the same except for a one-time setup harge of $60,000. No additional design, marketing, or distribution costs will be incurred. hat is the minimum acceptable bid per unit on this one-time-only special order? (Round ur final answer to the nearest cent.) A) $184.00 BY $484.00 C) $172.00 D C238 00

Answer 1

Solution The 7 Leaves Café shall acccept the minimum bid price per unit so as its total relevant cost to fulfill the special order are reccovered. The total fixed manufacturing overhead costs, design costs, marketing and distribution costs shall remain unchanged whether or not the special order is accepted, hence these costs are irrelevant costs for the special order. The company shall incurr one-time set up cost of $60,000 for the special order, hence one time setup cost shall be relevant cost to calculate the minimum bid price. All the variable manufacturing cost shall be relevant cost for the special order Computation of minimim bid price for the special order: Step-1: Computation of total relevant cost for the special order Direct material cost ($140 x 5,000 units) $700,000 Direct labor cost (14,000 hours x 5,000/ 20,000) x $20 $70,000 Variable manufacturing cost ($360,000 20,000) x 5,000 $90,000 $60,000 One time setup cost Total relevant cost for the special order $920,000 Step-2: Computation of Minimum acceptable bid price per unit Minimum acceptable bid price per unit = Total relevant cost/ special order units = $920,000/5,000 units = $184 Minimum acceptable bid price per unit for the special order is $184.