Question

SureLock Manufacturing Co. makes and sells several models of locks. The cost records for the ZForce lock show that manufacturing costs total $23.00 per lock. An analysis of this amount indicates that $13.34 of the total cost has a variable cost behavior pattern, and the remainder is an allocation of fixed manufacturing overhead. The normal selling price of this model is $36.00 per lock. A chain store has offered to buy 14,000 ZForce locks from SureLock at a price of $16.10 each to sell in a market that would not compete with SureLock's regular business. SureLock has manufacturing capacity available and could make these locks without incurring additional fixed manufacturing overhead.

1. Calculate the effect on SureLock's operating income of accepting the order from the chain store.
2. If SureLock's costs had not been classified by cost behavior pattern, is it likely that a correct special order analysis would have been made?

Answer 1