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Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 138

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?

Answer options

Correct answer: A

Explanation

The relevant cost per unit for this special order includes only the variable costs since fixed costs do not change with the order. The variable costs are Direct labor ($2) + Direct material ($5) + Variable manufacturing ($2.50), totaling $9.50. Therefore, the correct answer is A, while B, C, and D include costs that are not relevant to the decision.