Question

Wilson company normally produces 20,000 tennis rackets per year, but has enough capacity to produce 25,000. a customer has requested a special order of 2,000 wilson tennis rackets for $40 per unit. the normal selling price is $50. costs related to the special order are $30 per racket plus $11,000 for requested modifications to the special order rackets. wilson incurred $50,000 of costs to design the racket and has $100,000 of allocated general overhead costs per year. what is the financial advantage or disadvantage of accepting the order? multiple choice question.

a. $9,000 advantage
b. $9,000 disadvantage
c. $29,000 disadvantage
d. $29,000 advantage

Answer 1

Accepting the special order would result in a financial advantage of a. $9,000 for Wilson Company, as the total revenues of the special order exceed the incremental costs by this amount.

Step-by-step explanation:

The financial advantage or disadvantage of accepting a special order for Wilson Company can be calculated by comparing the additional revenues generated from the order against the incremental costs incurred by producing and selling the additional units. The special order will generate total revenues of 2,000 units at $40 each, which amounts to $80,000. The costs related to the special order include the variable costs of $30 per racket, totaling $60,000 for 2,000 rackets, plus the special modification costs of $11,000. The costs to design the racket and the allocated general overhead costs are sunk costs and irrelevant to this decision as they do not change with the decision to accept or reject the special order.

To calculate the financial impact:

• Total Revenue: 2,000 rackets × $40/racket = $80,000
• Total Special Order Costs: (2,000 rackets × $30/racket) + $11,000 = $60,000 + $11,000 = $71,000
• Financial Advantage: Total Revenue - Total Special Order Costs = $80,000 - $71,000 = $9,000

Therefore, accepting the special order would result in a financial a. advantage of $9,000 for Wilson Company.