Question

Prairie, Inc. produces one single product. It has an annual capacity of 10,000 units, but currently uses only 80% of it. Each unit is sold for $50 and requires direct material worth $30 and direct labor worth $5. Manufacturing overhead cost is $10 per unit of which 70% is variable. Should a special order to sell 1,000 units at $44 be accepted? Yes No

Answer 1

Yes, the order should be accepted

Step-by-step explanation:

Given:

Annual capacity = 10,000 units

Used capacity = 80%

Selling cost of each unit = $50

Cost of Direct material required per unit = $30

Direct labor cost = $5

Manufacturing overhead cost = $10 per unit

variable cost = 70% of $10 = $7

Number of units in special order = 1,000

Now,

The incremental revenue generated by the special order

= $44 per unit × 1,000 units

= $44,000

Also,

The incremental cost

= (direct materials cost + direct labor cost + variable cost ) × 1,000 units

= ( $30 + $5 +$7 ) × 1,000 units

= $42,000

incremental net operating income generated = $44,000 − $42,000

= $2,000

Since,

the net operating income is positive the order should be accepted