Integrated Masters Inc. (IMI) is presently operating at 50% of capacity and manufacturing 50000 units of a patented electronic component. The cost structure of the component is as follows:
Raw materials $ 1.50 per unit
Direct labor 1.50 per unit
Variable overhead 2.00 per unit
Fixed overhead.......................................................... $100000 per year
An Italian firm has offered to purchase 30000 of the components at a price of $6 per unit FOB IMI's plant. The normal selling price is $8 per component. This special order will not affect any of IMFs ' normal" business. Management calculated that the cost per component is $7 so it is reluctant to accept this special order.
Required:
a. Show how management came up with a cost of $7 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 lie accepted? Why or why not?