Question

Your Brother's Corporation is considering two alternatives that are code-named S and T. Costs associated with the alternatives are listed below. He has asked for your help in deciding which alternative to choose.

	Alternative S	Alternative T
Material costs............	$ 48,000	$ 63,000
Labor costs...............	$ 40,000	$ 40,000
Utility costs...............	$ 57,000	$ 46,000
Quality Control costs.......	$ 15,000	$ 15,000

After consideration of the alternatives, answer the two questions:
a. After consideration of the two alternatives, please identify the costs that are relevant AND the costs which are not relevant in the choice. (1/2 pt each)
b. Calculate the differential cost between the two alternatives. (Show your calculations) (1 pt)

.

Your Corporation has received a request for a special order of 9,500 units of product AB1 for $54.00 each. The normal selling price of this product is $60.99 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product AB1 is computed as follows:

Unit product costs, current
	Direct Materials			$    19.50
	Direct Labor			$ 8.10
	Variable MOH			$ 5.00
	Fixed MOH			$ 5.50
	Total unit product cost			$    38.10

Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product AB1 that would increase the variable costs by $4.00 per unit and that would require a one-time investment of $40,000 in a special jig that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

Directions:  Determine the effect on the company's total net operating income of accepting the special order. Show your work!

Answer 1