IIA-CIA-Part3 Exam - Question 178

Question

A company produces water buckets with the following costs per bucket:

Direct labor = $2 -

Direct material = $5 -

Fixed manufacturing = $3.50 -

Variable manufacturing = $2.50 -

The water buckets are usually sold for $15. However, the company received a special order for 50,000 water buckets at $11 each.

Assuming there is adequate manufacturing capacity and all other variables are constant, what is the relevant cost per unit to consider when deciding whether to accept this special order at the reduced price?

Examice · Accepted Answer

When evaluating a special order, only the variable costs are relevant because fixed costs will be incurred regardless of the decision. The relevant costs include direct labor ($2), direct material ($5), and variable manufacturing costs ($2.50), totaling $9.50 per unit. Fixed manufacturing costs are not relevant as they do not change based on the order. Therefore, the relevant cost per unit to consider is $9.50.

Elvin · Answer

Why not A? It says there’s capacity.

IIA-CIA-Part3 Exam - Question 178

Discussion