MA70 Problem: Relevant Costing – Special Orders - Kimco Inc.

MA70 Problem: Relevant Costing – Special Orders - Kimco Inc.

Kimco Inc. produces a single product. The cost of producing and selling a single unit of this product atthe company’s normal activity level of 8,000 units per month is:Direct materials $2.50Direct labour 3.00Variable overhead 0.50Fixed overhead 4.25Variable selling and administrative expense 1.50Fixed selling and administrative expense 2.00The normal selling price is $15 per unit. The company’s capacity is 10,000 units per month. An order has been received from an overseas source for 2,000 units at a price of $12 per unit. This order would notdisturb regular sales.

 Required:

1.

If the order were accepted, by how much would monthly profits be increased or decreased? (Theorder would not change the company’s total fixed costs.)2.

Assume that the company has 500 units of this product, which are inferior to the current model, leftover from last year. The units must be sold through regular channels at reduced prices. What unit costfigure is relevant for establishing a minimum selling price for these units? Explain.