Question

A Corporation produces shiny discs. A special order has been placed by the customer to Rick for 2,200 units of the shiny disc for $38 a unit. While the disc would be modified slightly for the special order, the normal unit product cost for each disc is $16.90:

Direct materials $ 4.60
Direct labor 4.00
Variable manufacturing overhead 1.70
Fixed manufacturing overhead 6.60
Unit product cost $ 16.90
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 each disc that would increase the variable costs by $1.90 per unit and that would require an investment of $16,000 in special equipment that would have no salvage value.
This special order would have no effect on Rick Corp.'s other sales. The company has enough spare capacity for producing the special order.
What would be the annual financial advantage (disadvantage) for Rick as a result of accepting this special order?
a) $40,760
b) $15,700
c) $2,000
d) $16,200

Answer 1

Rick Corporation

The annual financial advantage (disadvantage) for Rick as a result of accepting this special order is:

a) $40,760

Step-by-step explanation:

a) Data and Calculations:

Special order for 2,200 units of shiny disc at $38 a unit

Normal product cost: Special order:

Direct materials $ 4.60 $ 4.60

Direct labor 4.00 4.00

Variable manufacturing overhead 1.70 1.70

Additional variable cost 1.90

Total variable costs $10.30 $12.20

Fixed manufacturing overhead 6.60 0

Investment in special equipment ($16,000/2,200) 7.273

Unit product cost $ 16.90 $19.473

Annual Financial Advantage (Disadvantage) for the special order:

Sales Revenue ($38 * 2,200) = $83,600

Variable costs ($12.20 * 2,200) 26,840

Contribution ($25.80 * 2,200) $56,760

Special equipment 16,000

Financial Advantage $40,760