Question

A customer has requested that Lewelling Corporation fill a special order for 9,000 units of product S47 for $20.50 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $14.40:

Direct materials	$	3.10
Direct labor		1.50
Variable manufacturing overhead		6.40
Fixed manufacturing overhead		3.40
Unit product cost	$	14.40

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 $5.00 per unit and that would require an investment of $36,000 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. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Multiple Choice

• $(9,900)

• $4,500

• $54,900

• $(26,100)

Answer 1

Answer:
Particulars	Amount (in $ )
Sales Revenue ( 9,000 Units x $ 20.50)	$ 184,500
Less: Variable Costs
Direct Materials        ( 9,000 x $ 3.10)	($ 27,900)
Direct Labour          ( 9,000 x $ 1.50)	($ 13,500)
Manufacturing Overhead             ( 9,000 x $ 6.40)	($ 57,600)
Increase in variable Cost              ( 9,000 units x $ 5)	($ 45,000)
Cost of Special tool	($ 36,000)
Total Costs	($ 180,000)
Financial advantage	$ 4,500
Option (b) is Correct - $ 4,500