Question

Following are unit costs-

Direct Materials: $7.00
Direct Labor: $5.30
Variable Manufacturing overhead: $1.50
Fixed Manufacturing Overhead: $5.90
Variable Selling Expenses: $2.10
Fixed Selling Expenses: $3.40

Normal Selling price is $30 per unit.
A Special order of $20 per unit is received for 10,000 unites
It would not affect normal sales.

Required:
Should the order be accepted?
Show Calculations

Answer 1

Increase in sale will not make any impact on Fixed expenses. so we have to check special order price is covering our variable expenses or not

Sales ($20*10,000)	$ 200,000
Less: Expenses
Direct material ($7*10,000)	$    70,000
Direct labor ($5.30*10,000)	$    53,000
Variable manufacturing overhead ($1.5*10,000)	$    15,000
Variable selling expense ($2.10*10,000)	$    21,000
Total expenses	$ 159,000
Net income	$    41,000

Company should accept the special order. so they can earn an additional income of $41,000

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