Question

Belle`s Accessories Limited makes fashion purses. They have received a request for a special order of 100 purses. The normal selling price and unit costs per purse are as follows:

            Sales price                               $100

            Direct materials                           30

            Direct labour                               20

            Manufacturing overhead             10

The manufacturing overhead is 80% fixed and 20% variable. The customer would like a special design imprinted on the purse that will increase direct labour by $1 per purse. The company has excess capacity and can handle the special order and accepting this special order will not affect regular sales.

Required:

1. Should Belle`s Accessories Limited accept the special order if the customer is only willing to pay $55 per purse.

Answer 1

In the special order, direct labor cost will increase by $1 per unit. Thus, direct labor cost in the special order will be $21.

Manufacturing overhead = $10 per unit

20% of manufacturing overhead is variable

Variable manufacturing overhead = 10 x 20%

= $2 per unit

Fixed manufacturing overhead will not increase by accepting the special order.

Evaluation of Special Order
Sales revenue (100 x 55)	5,500
Expenses:
Direct materials (100 x 30)	-3,000
Direct labor (100 x 21)	-2,100
Variable manufacturing overhead (100 x 2)	-200
Net income	$200

Should Belle`s Accessories Limited should accept the special order. It will increase net income by $200.

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