Question

A company normally sells a product for $20 per unit. Variable per unit costs for this product are: $2 direct materials, $4 direct labor, and $1.50 variable overhead. The company is currently operating at 70% of capacity producing 14,000 units per year. Total fixed costs are $42,000 per year. The company should not accept a special order for 2,000 units which would be sold for $10 per unit because there would be an incremental loss on the order.TrueFalse

Answer 1

The given statement is false.

Step-by-step explanation:

First we have to compute the total cost which is attached to a product which is shown below:

= Direct material cost + Direct labor cost + variable overhead cost

= $2 + $4 + $1.5

= $7.5 per unit.

Since the total cost comes $7.5 per unit and the special order sold at $10 per unit which shows a difference of $2.5 per unit. By taking a difference of $2.5 per unit, the company can earn more profits than earlier.

And, the selling price for special order is high than the total cost which increase the profitability of a company.

The other cost is irrelevant as the calculation part is not depended on these cost like fixed cost, production capacity, etc.

Thus, the given statement is false.