Circuit Masters, Inc. (CMI), is presently operating at 80% of capacity and manufacturing 120,000 units of a patented electronic component. The cost structure of the component is as follows:
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . $ 6.00 per unit
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . 6.00 per unit
Variable overhead . . . . . . . . . . . . . . . . . . . . . 8.00 per unit
Fixed overhead . . . . . . . . . . . . . . . . . . . . . . . $480,000 per year
An Italian firm has offered to purchase 20,000 of the components at a price of $24 per unit, FOB CMI’s plant. The normal selling price is $32 per component. This special order will not affect any of CMI’s “normal” business. Management calculated that the cost per component is $24, so it is reluctant to accept this special order.
Required:
a. Show how management came up with a cost of $24 per unit for this component.
b. Evaluate this cost calculation. Explain why it is or is not appropriate.
c. Should the offer from the Italian firm be accepted? Why or why not?