Question

Gallerani Corporation has received a request for a special order of 5,700 units of product A90 for $27.90 each. Product A90's unit product cost is $27.35, determined as follows: Direct materials $ 3.05 Direct labor 8.35 Variable manufacturing overhead 7.45 Fixed manufacturing overhead 8.50 Unit product cost $ 27.35 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 A90 that would increase the variable costs by $4.20 per unit and that would require an investment of $21,000 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:

Answer 1

The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be $6,645

Step-by-step explanation:

Company's current variable expenses = Direct Material + Direct Labor + Variable Manufacturing Overhead.

= $3.05 + $8.35 + $7.45 = $18.85

Note: Fixed expenses will not be considered as for this purpose, because they are already incurred and its within the capacity of company, to produce such additional units, here the decision will be based on additional cost which are variable cost and additional mold cost of $21,000 and variable cost of $4.20 per unit.

If we would have considered absorption costing then the normal fixed cost would also have been considered.

Here Total cost of 5,700 units = Total variable cost = $18.85 + $4.20 = $23.05

Fixed Cost = $21,000

Total = $23.05
`*` 5,700 + $21,000

= $131,385 + $21,000 = $152,385

Revenue from these 5,700 units = $27.90
`*` 5,700 = $159,030

Net result = $159,030 - $152,385 = $6,645

Since the result is positive with a financial advantage of $6,645 the project shall be accepted.

Final Answer

The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be $6,645