Question

Faux Stamp company contemplating the acceptance of a special order has the following cost behavior, based on production of 10,000 units. The company is currently operating at 70% of its manufacturing capacity. A customer wants to purchase 2,000 units at a special unit price of $25. The normal price per unit is $50. Direct materials are $4 per unit, direct labor is $10 per unit, variable overhead is $8 per unit, and fixed overhead is $60,000 total. Perform an incremental analysis to determine the effect on net income if the special order is accepted, and decide whether management should accept the special order. What is the impact on net income if you accept the order?

Answer 1

Management should accept the order because it increases net income by $6,000.

Step-by-step explanation:

Giving the following information:

Number of units= 2,000

Unit selling price= $25

Direct material= $4

Direct labor= $10

Variable overhead= $8

Because it is a special order and there is unused capacity, we won't take into account the fixed costs.

To calculate the effect on income, we need to use the following formula:

Effect on income= number of units*unitary contribution margin

Effect on income= 2,000*(25 - 4 - 10 - 8)

Effect on income= $6,000 increase

Management should accept the order because it increases net income by $6,000.