Question

Special Order Decision

Integrated Masters Inc. is currently operating at 50% capacity and manufacturing 50,000 units of a patented electronic component.The cost structure of the component is as follows:

Raw Materials	$1.50 per unit
Direct Labor	$1.50 per unit
Variable Overhead	$2.00 per unit
Fixed Overhead	$100,000 per year

An Italian firm has offered to purchase 30,000 units at a price of $6 per unit.The normal selling price per unit is $8.This special order will not impact any of Integrated Master’s current business.The company has computed its cost per unit as $7 so it is reluctant to accept this offer.

Should Integrated Masters accept this Special Order?Show the calculation that helps you develop your answer.

Answer 1

Let me tell you a very easy way to solve these type of problems.

Remember that only variable costs must be considered while evaluating the decisions. Because fixed costs are incurred whether we accept the order or not. So fixed costs are irrelavent

Now if the outsider price is more than variable costs combined, we should accept the order. Reject otherwise.

Now lets do your problem.

Financial advantage = Special order price - Cost of making (Variable costs)

= (6*30,000 units) -( (1.50+1.50+2)*(30,000))

= 180,000 - 150,000

Financial advantage = 30,000

If you still have any queries comment.