Question

A customer has requested that Lewelling Corporation fill a special order for 2,100 units of product S47 for $39 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $17.60:

Direct materials $ 4.50
Direct labor 5.00
Variable manufacturing overhead 1.60
Fixed manufacturing overhead 6.50
Unit product cost $ 17.60
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 S47 that would increase the variable costs by $2.00 per unit and that would require an investment of $15,000 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?
Multiple Choice:
a. $39,390
b. ($14,700)
c. $15,200
d. ($1,900)

Answer 1

The annual financial advantage for Lewelling Corporation as a result of accepting the special order is calculated by subtracting additional variable costs and the mold costs from the additional revenue generated by the special order. The result is a financial advantage of $39,390 (option a).

Step-by-step explanation:

To calculate the annual financial advantage or disadvantage of accepting the special order for Lewelling Corporation, we need to consider the additional revenue generated by the order and the additional variable costs, as well as the one-time cost of the special molds. The normal unit product cost is not entirely relevant because fixed costs will not change with the special order.

First, we calculate the additional revenue:

• 2,100 units x $39/unit = $81,900 total revenue

Then we calculate the additional variable costs per unit, which include the normal variable costs plus the added $2.00 per unit for modifications:

• Direct materials: $4.50
  
• Direct labor: $5.00
  
• Variable manufacturing overhead: $1.60
  
• Additional modifications cost: $2.00
  
• Total additional variable cost per unit = $13.10

Multiply the total additional variable cost per unit by the number of units:

• 2,100 units x $13.10/unit = $27,510 total variable costs

Subtract the total variable costs and the cost of the special molds from the total revenue to get the financial advantage (or disadvantage):

• $81,900 (revenue) - $27,510 (variable costs) - $15,000 (mold costs) = $39,390 financial advantage

The correct answer is a. $39,390.