The following information relates to a product produced by Creamer Company:

Direct materials

$24

Direct labor

15

Variable overhead

30

Fixed overhead

18

Unit cost

$87

Fixed
selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects to produce only 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each.

The incremental cost per unit associated with the special order is

Select one:

a. $84

b. $81

c. $69

d. $64

B. $81

Explanation:

The incremental cost is the cost of producing an additional unit of output. Incremental costs always comprise of variable costs i.e. costs that fluctuate with changes in the level of output. For example, raw materials, packaging, direct labor and utilities. Understanding of incremental costs is important to boost efficiency and profitability. In the current situation, it is calculated as:

Direct materials: $24

Direct labor: $15

Variable overhead: $30

Variable selling costs: $12

Incremental cost per unit associated with special order: $24 + $15 + $30 + $12 = $81

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