Question

Technology Inc. Ltd sells desktop computer printers for $65 per unit. Unit product costs are:

Direct materials $12
Direct labor 20
Manufacturing overhead 6
Total $38

A special order to purchase 10,000 desktop computer printers has recently been received from another company, and Technology Inc. has the idle capacity to fill the order. The company will incur an additional $1.50 per printer for additional labor costs due to a slight modification the buyer wants to be made to the original product. One-third of the manufacturing overhead costs are fixed and will be incurred no matter how many units are produced. $2,100 of existing fixed administrative costs will be allocated to the order as "part of the cost of doing business".

Which of the data above should be ignored in making the special-order decision? For what reason?

Answer 1

In the special-order decision, ignore the original unit product costs, the fixed portion of the manufacturing overhead, and the allocated fixed administrative costs as they're sunk or unchanged by the special order.

Step-by-step explanation:

In making the special-order decision for Technology Inc. Ltd, certain costs that are not relevant to this decision should be ignored. The first is the original unit product costs of direct materials, labor, and manufacturing overhead, which total to $38, as this special order incurs an additional modification cost, changing the cost structure. The fixed portion of the manufacturing overhead, which amounts to one-third of the total overhead ($6), should also be disregarded; these costs will not change regardless of the special order.

Lastly, the existing fixed administrative costs of $2,100, which are being allocated to the order, should be ignored as they are sunk costs and will be incurred even if the special order is declined.