CAF-5 · Chapter 17 · Question 19 of 20
(Relevant Costing: Special Order Pricing with Spare Capacity Constraints) A factory produces 10,000 units currently (maximum capacity is 15,000 units). The regular selling price is Rs. 100, and variable costs are Rs. 60 per unit. A customer offers a special order for 6,000 units. To accept this entire order, the company must sacrifice some of its regular sales. What is the absolute minimum price per unit the company must charge for the special order to break even on the decision?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Rs. 66.67
Explanation
Capacity is 15,000. Current is 10,000. Spare is 5,000. Special order is for 6,000 units. Thus, 1,000 units of regular sales must be sacrificed. Relevant Variable Cost for order = 6,000 units * Rs. 60 = Rs. 360,000. Opportunity cost of lost sales = 1,000 units * Contribution (100 - 60) = Rs. 40,000. Total Relevant Cost = 360,000 + 40,000 = Rs. 400,000. Minimum Price = 400,000 / 6,000 units = Rs. 66.67.
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