Question

Rojo Corporation has received a request for a special order of 8,000 units of product W68 for $27.20 each. Product W68's unit product cost is $18.50, determined as follows:

Direct Materials $2.20

Direct Labor $7.90

Variable Manuf Overhead 1.50

Fixed Manuf. Overhead 6.90

Unit Product cost 18.50

Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product W68 that would increase direct materials by $6.50 per unit and that would require an investment of $31,000 in special molds that would have no salvage value.

This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

a) Should Rojo accept or reject this special order? Why? (Defend your answer by discussing the relevent revenues/costs and the incremental impact on Rojo's operating net income)

Answer 1

Answer:-Total relevant cost incurred in special order:-Direct material per unit +Direct labor per unit+ Variable manufacturing overhead + Additional direct material cost per unit+ Additional investment per unit

=$2.20+$7.90+$1.50+$6.50+($31000/8000 units)

=21.975 per unit

Net incremental income from accepting special order=($27.20-$21.975)*8000 units

=$41800

Hence Rojo should accept this special order.

Fixed manufacturing overhead is not relevant for decision making process. Hence it is a unavoidable cost.