Question

Hoffman Corp. currently sells 40,000 dental tools to its normal customers, but it has a capacity to produce 50,000 tools. Its product sells for $30 per tool and the variable costs incurred in manufacturing and selling the product are as follows on a per tool basis:
Direct materials - $8; Direct labor - $4; Sales commission - $2.
A customer has proposed a special order to purchase 10,000 tools at a special price of $20 per unit. If Hoffman accepts the order, the company would not have to pay its sales people their normal commission of $2 per unit, but the company would incur a shipping cost of $3 per unit.

28. If Hoffman accepts the special order, how would operating income is affected?
    a. Decrease by $80,000
    b. Decrease by $120,000
    c. Increase by $30,000
    d. Increase by $50,000

29. What is the minimum price per unit below which Hoffman should reject the order?
    a. $12
    b. $15
    c. $31
    d. $33

Answer 1

Solution :-

(28) The Answer is (d) Increase by $ 50,000.

(29) The Answer is (b) $ 15.

Additional Income on Accpeting Order :

Sales Price of Special Order : $ 20

Less : Materai Cost : $ 8

Less : Labor Cost : $ 4

Less : Freight Cost : $ 3

Additonal Income per Unit    : $ 5

Increment In Total Income : 10,000 * $ 5 = $ 50,000

Cost per Unit on Special Order = $ 8 + $ 4 + $ 3 = $ 15.

Company should not accept order below $ 15 per Unit.

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