Tigger Corporation makes a range of products. The company's predetermined overhead rate is $22 per direct labor-hour, which was calculated using the following budgeted data:
| Variable manufacturing overhead | $ | 68,000 |
| Fixed manufacturing overhead | $ | 306,000 |
| Direct labor-hours | 17,000 | |
Management is considering a special order for 640 units of product TG3R at $58 each. The normal selling price of product TG3R is $69 and the unit product cost is determined as follows:
| Direct materials | $ | 31.00 | |
| Direct labor | 12.00 | ||
| Manufacturing overhead applied | 22.00 | ||
| Unit product cost | $ | 65.00 | |
If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order.
Required:
The financial advantage (disadvantage) for the company as a result of accepting this special order would be:
direct material = $31
Direct labor = $12
Estimated variable manufacturing overhead = $68,000
estimated direct labor hour = 17,000
variable manufacturing overhead rate = Estimated variable manufacturing overhead/estimated direct labor hour
= 68,000/17,000
= $4 per direct labor hour
predetermined overhead rate = $22 per direct labor hour
manufacturing overhead per unit = $22 per unit
hence, $4 of manufacturing overhead is variable.
Special order size = 640 units
Selling price per unit in the special order = $58
Special order evaluation
| sales (640 x 58) | 37,120 |
| Expenses : | |
| Direct material (640 x 31) | -19,840 |
| Direct labor (640 x 12) | -7,680 |
| variable manufacturing overhead (640 x 4) | -2,560 |
| Net income | $7,040 |
financial advantage for the company of accepting this special order = $7,040
Get Answers For Free
Most questions answered within 1 hours.