Question

A company contemplating the acceptance of a special order has the following unit cost behavior, based on 10000 units:

Direct materials	$ 4
Direct labor	10
Variable overhead	8
Fixed overhead	6

A foreign company wants to purchase 2700 units at a special unit price of $25. The normal price per unit is $40. In addition, a special stamping machine will have to be purchased for $4000 in order to stamp the foreign company’s name on the product. The incremental income (loss) from accepting the order is

Answer 1

Variable cost per unit

Direct Material = $ 4

Direct Labour = $ 10

Variable overhead = 8

Total = $ 22

Fixed overhead will still be incurred even if the special order is accepted, therefore it wont be considered in calculating total cost.

Total cost for 2,700 units

= 2,700*22

= $ 59,400

Special Stamping machine to be purchased for this order.

= $ 4,000

Total cost = 59,400 + 4,000 = $ 63,400

Total revenue = 2,700*25 = $67,500

The incremental income from accepting the order will be

= 67,500 - 63,400

= $ 4,100

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