Question

Elfalan Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 47,000 units per month is as follows:

	Per Unit
Direct materials	$	46.10
Direct labor	$	8.80
Variable manufacturing overhead	$	1.80
Fixed manufacturing overhead	$	18.70
Variable selling & administrative expense	$	3.20
Fixed selling & administrative expense	$	15.00

The normal selling price of the product is $100.10 per unit.

An order has been received from an overseas customer for 2,700 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.90 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $83.40 per unit. The monthly financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Multiple Choice

$18,090

($27,540)

$68,580

($43,000)

Answer 1

Answer is option C $68,580

Relevant revenue = 83.40

Relevant cost:

Direct materials......................... .............. 46.10

Direct labor.......................... ....... ............. 8.80

Variable manufacturing overhead.......... 1.80

Variable selling and administrative expenses (3.20-1.90)....1.30

Relevant cost...................................................... 58

The monthly financial advantage (disadvantage) for the company as a result of accepting this special order should be: special order units*(relevant revenue - relevant cost) = 2700*(83.40-58) = 68580

Therefore answer is option C