Zena Technology sells arc computer printers for $55 per unit. Unit product costs are:
Direct Materials: $14
Direct Labor: $20
Manufacturing overhead: $3
Total: $37
A special order to purchase 15,000 arc printers has recently been received from another company and Zena has idle capacity to fill the order. Zena will incur an additional $2 per printer for additional labor costs due to a slight modification the buyer wants made to the original product. One-third of the manufacturing overhead costs is fixed and will be incurred no matter how many units are produced. When negotiating the price, what is the minimum selling price that Zena should accept for this special order?
In today’s competitive business landscape, companies often encounter opportunities to fulfill special orders that require careful evaluation to ensure profitability. Zena Technology, a prominent player in the printer industry, has received a special order from another company to purchase 15,000 ARC printers. This essay delves into the considerations that Zena Technology should take into account while negotiating the price for this special order and highlights the importance of determining the minimum selling price to safeguard profitability.
To determine the minimum selling price, it is crucial to comprehend the underlying cost structure associated with producing the ARC printers. Zena Technology’s unit product cost for the ARC printer is $37, comprising direct materials, direct labor, and manufacturing overhead. Manufacturing overhead consists of both fixed and variable components. In this case, one-third of the manufacturing overhead is fixed, meaning it remains constant regardless of the number of units produced. Variable costs, on the other hand, change with the level of production.
For the special order, Zena Technology will incur an extra $2 per printer in labor costs due to a minor modification requested by the buyer. This additional cost needs to be factored into the overall cost calculation. Thus, the updated cost per unit for the special order becomes $37 (original cost) + $2 (additional labor cost) = $39 per unit.
Calculating Total Costs: Given that the special order is for 15,000 units, the total cost of fulfilling the order can be calculated by multiplying the cost per unit with the number of units: $39 * 15,000 = $585,000.
To calculate the minimum selling price that Zena Technology should accept for this special order, the company needs to ensure that the revenue generated covers the total cost incurred, thereby avoiding any loss. The minimum selling price can be calculated as follows:
Minimum Selling Price = Total Cost / Number of Units Minimum Selling Price = $585,000 / 15,000 Minimum Selling Price = $39 per unit
In conclusion, the decision to accept a special order requires a comprehensive analysis of costs and potential revenue to ensure profitability. Zena Technology, in its endeavor to negotiate the price for the special order of 15,000 ARC printers, needs to consider both the original unit product cost and the additional costs incurred due to the requested modification. By factoring in these costs, Zena Technology should aim for a minimum selling price of $39 per unit to cover all expenses associated with fulfilling the order. This strategic approach will enable the company to optimize its profitability and make informed decisions that align with its business objectives.
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