COMMERCE 2AB3 Lecture Notes - Lecture 17: Opportunity Cost, Foodservice, Fixed Cost
Document Summary
Should the manager of xyz co. accept or reject the special order. Fixed costs are irrelevant because the company has idle capacity of 3000 units that will remain unused regardless of the special order. Delivery costs are irrelevant (although they are variable) - terms are fob factory. Incremental costs associated with the special order are: Direct materials ( per unit), direct labor ( per unit) and variable overhead ( per unit) are relevant. Sales commissions are relevant - but change to $. 90 per unit ()(. 02) Special order = (2,000)(45 - (10+20+4+. 90)) = ,200 gain. Note that the company has insufficient idle capacity available. The company has two options: expand capacity: Minimum selling price = 10+20+4+(. 02)(selling price) + 28,000/6,000 = . 46: decrease sales to regular customers: Income forgone from regular customer = (3,000)(60 - (10+20+4+1. 20+6)) = 56,400. Minimum selling price = 10+20+4+ (. 02)(selling price) + 56,400/6,000 = . 29.
