Question 2

Sunset Ltd is approached by an agent for an overseas customer seeking to source a large one-time-only special order for a product similar to one offered to regular customers. Sunset Ltd has excess capacity. They apply a sales mark-up of 80% on costs.

The following data applies for sales to regular customers:

Direct materials $540.00 per unit

Direct manufacturing labour

Direct labour rate is $25 per hour plus 30% on-costs

2.35 hours is applied per unit of production

Variable manufacturing overhead is $12.70 per unit

Fixed manufacturing overhead:

$150,000 per year allocated at 3 machine hours per unit

Total annual machine hours are estimated at 45,000

Required:

(a)What is the minimum acceptable price of this one-time-only special order?

(b)What price would be offered to long-term customers?