Problem
The following are Silver Corporation's unit costs of making and selling an item at a volume of 8,400 units per month (which represents the company's capacity):
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Manufacturing:
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Direct materials
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$ 1.80
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Direct labor
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$ 2.80
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Variable overhead
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$ 1.30
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Fixed overhead
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$ 0.80
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Selling and administrative:
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Variable
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$ 2.80
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Fixed
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$ 1.20
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Present sales amount to 6,600 units per month. An order has been received from a customer in a foreign market for 1,800 units. The order would not affect regular sales. Total fixed costs, both manufacturing and selling and administrative, would not be affected by this order. The variable selling and administrative costs would have to be incurred for this special order as well as all other sales. Assume that direct labor is a variable cost.
Assume the company has 90 units left over from last year which have small defects and which will have to be sold at a reduced price for scrap. The sale of these defective units will have no effect on the company's other sales. Which costs is relevant in this decision?