Question

Munoz Company manufactures a personal computer designed for use in schools and markets it under its own label. Munoz has the capacity to produce 29,000 units a year but is currently producing and selling only 11,000 units a year. The computer’s normal selling price is $1,770 per unit with no volume discounts. The unit-level costs of the computer’s production are $500 for direct materials, $170 for direct labor, and $100 for indirect unit-level manufacturing costs. The total product- and facility-level costs incurred by Munoz during the year are expected to be $2,240,000 and $802,000, respectively. Assume that Munoz receives a special order to produce and sell 3,090 computers at $1,250 each.

a. Contribution to profit?

Answer 1

Special order size = 3,090 computers

Selling price per computer in the special order = $1,250 each

The unit-level costs of the computer’s production are $500 for direct materials, $170 for direct labor, and $100 for indirect unit-level manufacturing costs.

Special order evaluation

Sales revenue (3,090 x 1,250)	3,862,500
Variable expenses:
Direct materials (3,090 x 500)	- 1,545,000
Direct labor (3,090 x 170)	- 525,300
Indirect unit-level manufacturing cost (3,090 x 100)	- 309,000
Contribution to profit	$1,483,200

The total product- and facility-level costs would not increase due to the acceptance of the special order.

Special order should be accepted since it would add $1,483,200 to the profit.

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