Reference no: EM132967609

XYZ Company manufactures a component that is used in electric vehicles. Although it has the capacity to manufacture 5,000 components a month without an increase in fixed costs, it typically manufactures and sells 4,500 components a month to 8 regular customers.

The cost to manufacture one of the components is:

Direct materials $14.00
Direct labour $35.00
Variable manufacturing overhead $1.00
Fixed manufacturing overhead allocated $22.22 ($100,000 / 4,500 components)

• Variable sales cost is $10.00 per component and fixed sales and administration cost is $95,000 per month.
• The company sells the components for $111 each.
• XYZ Company has been approached by a new customer. The customer wants to buy 1,500 components next month, but wants a special price of $70 per component. The variable sales cost of $10.00 per component will not apply to this customer. The customer has indicated that, if it is satisfied with XYZ Company's component and service, it will seriously consider becoming a regular customer.
• XYZ Company can increase manufacturing capacity to 7,000 components per month by signing a 2-year minimum lease on a new factory for $72,000 per year.

Assume the customer is prepared to sign a 2-year contract to buy the component, but wants to negotiate a special price. Also assume XYZ Company decided to increase capacity by leasing the new factory.

Problem 1: What is the minimum price that XYZ Company should accept? Show all calculations clearly.