Question

A manufacturing Corporation has received a request for a special order of 10,000 units of a product for $20.00 each. Product A90's unit product cost is $21.75, determined as follows:

Direct materials	$ 8.00
Direct labor (variable cost)	5.00
Variable manufacturing overhead	2.25
Fixed manufacturing overhead	6.50
Unit product cost	$ 21.75

The customer would like modifications made to the product that that would require an investment of $40,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The special order would have no effect on the company's total fixed manufacturing overhead costs. The company has ample spare capacity for producing the special order.

a) What is the annual financial advantage (disadvantage) of accepting this special order?

b) Should the company accept this special order? Why?

Answer 1

Calculation of net profit
	Per unit	10000 units
Sale price	$         20.00	$ 200,000.00
Less:
Direct material	$         (8.00)	$ (80,000.00)
Direct labor	$         (5.00)	$ (50,000.00)
Variable overhead	$         (2.25)	$ (22,500.00)
Special custom cost		$ (40,000.00)
Net profit		$     7,500.00
The order should be accepted because:
1. The order provides additional financial advantage of $ 7,500.
2. There is no impact on current sale level due to this special order.