Question

List Price	$22.00
Direct Materials	$             5.35
Direct Labor	5.50
Variable Manufacturing Costs	3.25
Fixed Manufacturing Costs	2.05
Variable selling, general & administrative costs	1.45
Fixed selling, general & administrative costs	1.75
Total costs per unit	$           19.35
Special Order price	15.00
Special order volume	20,000

Carly Company produces and sells a consumer goods product. The list price for this product is $22.00 per unit. The product’s per unit costs are provided at left. A potential customer has approached Carly with an offer to purchase 20,000 units of Carly’s primary product at a price of $15.00 per unit. Carly has excess production capacity and could easily fill this order.

What effect would accepting this order have on Carly’s pretax profit? Show your work.

Answer 1

	Since Company has excess capacity to fulfill the order the relevant cost for the order is Variable Cost to be incurred:
	Variable Cost to be Incurred:
	Direct Material	5.35
	Direct Labor	5.50
	Variable MOH	3.25
	Variable S&A Cost	1.45
	Total Relevant Cost	15.55
	Special Order Price	15.00
	Loss PU	-0.55
	Special Order Volume	20000
	Loss on Accepting the Order	-11000	(Pretax Value)