Grommet Limited manufactures its only product in its Salt Lake City factory. The general manager, Elizabeth Miller, has just received a special request from a customer for 10,000 units of this product to be produced and delivered this month. The customer has suggested a selling price of $3.00 per unit. Elizabeth is unsure whether she should accept this offer. 

The company normally produces and sells 50,000 units per month, and capacity is 70,000 units per month. The normal selling price is $4.00 per unit. Elizabeth approached Brian Smith, the plant accountant, with the issue. Brian was unable to provide a full analysis immediately because he had to rush off to a meeting. However, after quickly reviewing his files, Brian provided the following schedule of cost information:

As he rushed off to his meeting, Brian indicated that if production exceeds 62,000 units per month, an additional supervisor must be hired on a month-to-month contract basis and costs will increase by $7,700 per month. 

All requirements below are independent situations. Activity levels in the above exhibit do not include the special request for 10,000 units. 

Required 

(a) Assume that Grommet Limited expects to be working at a level of 50,000 units for the month. Calculate the minimum price the company could charge for this special order without reducing its expected net income. Assume also that variable costs per unit are the same at all levels of production. 

(b) If Grommet Limited expects to produce and sell 55,000 units this month, calculate the minimum price the company could charge the customer for this special order without reducing its expected net income.  

Transcribed Image Text:

UNITS OF PRODUCTION PER MONTH 40,000 50,000 60,000 70,000 AVERAGE UNIT COST $3.675 $3.500 $3.383 $3.410