The general manager of Princeton Manufacturing, a manufacturer of washing machines, is considering a special order for 20,000 machines. The machine would be similar to an existing product currently being made for a long-term customer. The cost card for the existing machine shows the following information:
Direct materials
$225
Direct labour
95
Manufacturing overhead
120
Total manufacturing costs
$440
Selling and administration costs
75
Total product cost
$515
A costing study has established that approximately half the manufacturing overhead assigned to the average machine is variable and approximately 20% of the selling and administration costs assigned to the average machine is variable.
Required:
a. Absent any other issues, what is the minimum price Princeton Manufacturing should accept for this order?
b. Assume the average machine, whose cost card appears above, sells for $1,100. Princeton
Manufacturing has available capacity to produce 60% of the special order, but would have to sacrifice the sale of 800 regular machines to complete this order. How, if at all, would the minimum price Princeton Manufacturing should accept for this order change and why.
