Question

The Cork Company has been sent a special order of 6,000 dongles to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 dongles per month with total fixed production costs of $144,000. At present, the company is selling 80,000 dongles per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one dongle is:
Variable Production $4.60
Cost Fixed Production Cost $1.80
Variable Selling Expense $1.00
At what selling price per unit should Cork be indifferent between accepting or rejecting the special offer?
a. $7.40.
b. $7.70
c. $6.40
d. $4.90.
e. None of the answers provided is correct.

Answer 1

Answer:

Indifferent special order price=$5.60

Explanation:

To determine whether or not Cork Company should accept the order, we will compare the variable cost of the order to the sales value . If the special order generates a positive contribution margin, then it should be accepted.'

The relevant cash flows to be considered here includes

1. Variable cost of the special order

2. Sales revenue from the special order.

Note that the fixed cost are general unavoidable costs which would be incurred either way. And therefore should not be considered .

variable cos per unit = 4.60 +1.00= 5.60

                                                                           $

Sales revenue from special order

(7×6,000)                                                       42,000

Variable cost (5.60× 6,000)                         (33,600)

Net income from special order                   8,400        

A special order price that will produce a net income of zero is that which will make  the Cork Company indifferent. And such price is that which equals to the variable cost of selling

Indifferent special order price = variable cost per unit = $5.60

Indifferent special order price=$5.60

Answer 2

The special offers under the cost accounting are the changes or the events arranged in between the regular business operations. The special offer is launched at lower or higher variable costs. This is done either to attract customers or to clear off the stock.

The correct option is e. None of the answer provided is correct.

The selling price per unit that is indifferent between accepting or rejecting the special offer is $5.60

As per the computation, the special offer should be accepted.

Computations:

The indifferent special order price should include only the variable cost.

$\text{Indifferent price}=\text{Variable Production cost}+\text{Variable selling expense}\\\\=\ 4.60+\ 1.00\\\\=\ 5.60$

Computation of net income from a special offer:

$\text{Net Income}=\text{Sales revenue}-\text{Variable cost}\\\\=(\ 7\times6,000)-(\ 5.60\times6,000)\\\\=\ 442,000-\ 33,600\\\\=\ 8,400$

For taking the decision of accepting  or rejecting the special offer:

• variable costs of existing and special offers are compared.
• The variable cost and the selling price must be equal for generating a net income of zero.
• The positive contribution margin indicates acceptance of the special offer.

To know more about cost accounting, refer to the link:

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