Reference no: EM132603514

The following are the Baby Clothes Company's unit costs of making and selling an item at a volume of 12,000 units per month, which represents the company's capacity:

Manufacturing:

Direct Materials = $1.50

Direct Labor = $2.00

Variable Overhead = $0.50

Fixed Overhead = $0.90

Selling and Administrative:

Variable = $2.00

Fixed = $0.60

Present sales amount to 11,000 units per month. An order has been received from a customer in a foreign market for 1,000 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 8,000 and 10,000 units per month. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume direct labor is a variable cost.

Question 1: How much will the company's operating income be increased or (decreased) if it prices the 1,000 units in the special order at $8 each?

A. ($500).

B. $400.

C. $2,000.

D. $2,500.

Question 2: Assume the company has 50 units left over from last year that have small defects and which will have to be sold at a reduced price as scrap. This would have no effect on the company's other sales. What cost is relevant as a guide for setting a minimum price on these defective units?

A. $1.50.

B. $3.50.

C. $5.00.

D. $6.50.