Question

A customer has requested that Lewelling Corporation fill a special order for 2,800 units of product S47 for $33 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $23.30:

Direct materials	$	6.40
Direct labor		5.00
Variable manufacturing overhead		3.50
Fixed manufacturing overhead		8.40
Unit product cost	$	23.30

Assume that 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 S47 that would increase the variable costs by $2.00 per unit and that would require an investment of $18,000.00 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. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

$27,080

($17,700)

$18,200

($2,600)

Answer 1

Ans.	Option 1st $27080
	*Calculation:
	Particulars		Amount
	Sales (2800*33)		92400
	Less: Variable costs:
	Direct materials (6.40*2800)	17920
	Direct labor (5*2800)	14000
	Variable manufacturing overhead (3.5*2800)	9800
	Increase in variable costs (2*2800)	5600	47320
	Less: Investment in special molds		18000
	Financial adventage (inc. in net income)		27080
	*Fixed costs always remain constant, it is not included in the calculation of increase in net operating income because
	it is not a relevant cost.