Question

Zephram Corporation has an annual plant capacity to produce 5,000 units. Its predicted operations for

the year follow:

Sales volume 3,800 units

Sales price $42 per unit

Direct materials $15 per unit

Direct labor $10 per unit

Variable overhead $4.5 per unit

Fixed overhead (based on predicted sales) $1.5 per unit

Variable selling & administrative $2.5 per unit

Fixed selling & administrative $4,500

One of Zephram’s customers asked the company to fill a special order of 1,200 units at $31 per unit.

No variable selling costs will be incurred on the special order and unit variable manufacturing

overhead cost on the special order will be reduced by 55%. However, if the order is accepted,

management estimates that per unit direct materials and per unit direct labor of the special order units

will increase by 35% as a result of special packaging requested by the customer.

Required:

Complete the below table to evaluate the effect of this special order on Zephram’s profitability.

Income statement

Answer 1

Zephram Corporation
Income statement		present	Special Order
Sales Volumes units		3800	1200
Sales Price $	A	42	31
Less:- Variavble Costs
Direct materials $	B	15	20.25
Direct labor $	C	10	13.5
Variable overhead $	D	4.5	2.025
Variable selling & administrative $	E	2.5	0
Total Variable Costs	F=B+C=D+E)	32	35.775
Contribution $	G=A-F	10	-4.775
Total Contribution $	H=3800*G	38000	-5730
Less:- Fixed Costs
Fixed Overheads	I=3800* $1.5	5700
Fixed Selling & Administrative	J	4500
Total Fixed Costs $	K	10200
Net Income $	L=H-K	27800

Special order reduces the profit by $ 5,730 from $ 27,800. So not to accept the special order.