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Landor Appliance Corporation makes and sells electric fans. Each fan regularly sells for $42. The following cost data per fan is based on a full capacity of 147,000 fans produced each period. Direct materials $ 9 Direct labor $ 7 Manufacturing overhead (50% variable and 50% unavoidable fixed) $ 8 A special order has been received by Landor for a sale of 25,000 fans to an overseas customer. The only selling costs that would be incurred on this order would be $3 per fan for shipping. Landor is now selling 122,000 fans through regular channels each period. Assume that direct labor is an avoidable cost in this decision. What should Landor use as a minimum selling price per fan in negotiating a price for this special order

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Answer:

The minimum selling price = $23

Explanation:

The minimum selling price to be acceptable for the special order be the same as the relevant variable cost of producing a unit.

The relevant variable cost = marginal cost of a unit

Marginal cost = Direct material + Direct labour + Variable manufacturing overhead + shipping cost

Marginal cost = 9+ 7 + (50%× 8) + 3= 23

The minimum selling price = $23

Note : The 50% balance of manufacturing overhead which represents unavoidable fixed costs is irrelevant for this decision. These are costs that would be incurred either way whether or not the special order is accepted.

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