The following are the Jensen Corporation's unit costs of making and selling an item at a volume of 2,000 units per month (which represents the company's capacity): Manufacturing: Direct materials $2.00 Direct labor $3.00 Variable overhead $1.50 Fixed overhead $0.35 Selling and Administrative: Variable $3.00 Fixed $0.75 Present sales amount to $1,200 units per month. An order has been received from a customer in a foreign market for 200 units. The order would not affect current sales. Fixed costs, both manufacturing and selling and administrative, are constant within the relevant range between 1,200 units and 2,000 units. The variable selling and administrative expenses would have to be incurred on this special order as well as for all other sales. Direct labor is a variable cost. Assume the company has 50 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 of the following costs is relevant in this decision?
a. $6.50 variable manufacturing cost
b. $6.85 unit product cost
c. $3.00 variable selling and administrative cost
d. $10.60 full cost

Both variable and absorption accounting calculations must take into account variable selling and administrative costs. In contrast to fixed expenses, which frequently fluctuate, variable costs, such as commissions, bonuses, and utility bills, are dependent on the production and sales of the product throughout the period. Variable manufacturing costs must be separated from variable marketing and administrative costs, which frequently have identical account names.

A relevant expense in managerial accounting is one that might have been avoided if a particular business action had not been made. In the aforementioned situation, the variable selling and administrative cost, which is then the relevant cost, was highlighted as the sole cost that would change if the new order will be handled.

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