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Answer (A) is correct . The minimum selling price equals the incremental costs of the special order (variable manufacturing costs, variable packaging costs, distribution costs, and setup costs) divided by the units ordered. The fixed costs do not change because the manufacturer has excess capacity. Total variable manufacturing costs are $190,000 [40,000 × ($4.85 – $.45 + $.35)], distribution costs are $32,000, and setup costs are $60,000. Thus, the minimum unit price is $7.05 [($190,000 + $32,000 + $60,000) ÷ $40,000].

Answer (B) is incorrect because Adding the additional distribution costs to the original distribution costs [$1.80 + .80] equals $8.85.
Answer (C) is incorrect because Adding an amount for the fixed costs to the relevant costs results in $9.05.
Answer (D) is incorrect because Adding an amount for the target return on investment to the relevant costs results in $9.55.