Johnson Overhead
Intro Accounting – Special Orders?
Bob Johnson, Inc., sells a lounging chair for $25 per unit. It incurs the following costs for the product: direct materials, $11; direct labor, $7; variable overhead, $2; and fixed overhead, $1.
The company has received a special order for 50 chairs. The order would require rental of a special tool that rents for $300. Bob Johnson, Inc., has sufficient idle capacity to produce the chairs for this order.
Required
Calculate the minimum price per chair that the company could charge for this special order if management requires a $500 minimum profit on any special order.
I added up the costs to make one chair and got $21 dollars. Then I
multiplied 21 x 50 chairs = 1050. Then I added 300 special tools + 500
minimum profit + 1050 and got 1850. I then divided this number by 50
chairs and got 37. I don’t know why this isn’t the correct answer
because 1850-1050 = 800 Then 800 – 300 tools = 500 profit.
can someone please help
You ignore the fixed overhead when doing this calculation. You do that since, theoretically, the fixed overhead is covered by the normal throughput for the company. So to do this problem, you just look at the incremental costs.
So the costs per product would be $20. The additional rental of the special tool is $300. Add to that the $500 profit and you need to bring in a total of $800 additional.
$800 / 50 = $16
$16 + $20 = $36
So to earn an additional $500 on the special order, you need to charge $36 per chair.
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