Reference no: EM133151567

Question - Swan River Limited produces a single product. The cost per unit is comprised, in part, of the following:

Cost per Unit:

Direct Materials $12

Direct Labour $8

Variable Overhead $6

Variable Selling Expenses $5

Fixed Overhead $1

The fixed overhead cost of $1 per unit is based on the production quantitiy of 20,000 units in the master budget. If more than 20,000 units are produced, the Company will incur an additional $100,000 of fixed overhead costs. Swan River's fixed selling and administrative expense is $40,000, regardless of the number of units sold.

Required -

A) Assume Michelangelo Ltd. offers to supply this product to Swan River at a cost of $28 per unit. Swan River is expecting to sell 18,000 units in the upcoming year. Explain whether Swan River should accept or reject the offer from Michelangelo. Provide supping calculations. How would your answer change if the expected volume was 25,000 units?

B) For this part of the question, ignore part A. Swan River expects to sell 18,000 units during the year at $40 per unit. It has been invited to bid to supply a special order for 10,000 units. Swan River expects to incur only $1 per unit in variable selling expenses to fill the special order; all other variable costs will remain unchanged. Swan River plans to fill the order by adding the 10,000 units to its regular production. Calculate the minimum price per unit Swan River should bid that would make the special order acceptable.