Question

TB MC Qu. 13-81 (Algo) A customer has requested that ABC Corporation... A customer has requested that ABC Corporation fill a special order for 2,800 units of product S47 for $32 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $17.70: Direct materials $ 5.20 Direct labor 3.00 Variable manufacturing overhead 2.30 Fixed manufacturing overhead 7.20 Unit product cost $ 17.70 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 $1.30 per unit and that would require an investment of $16,000.00 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:

Answer 1

Financial advantage $40,560

Step-by-step explanation:

A special order request is financially worthy if the sales revenue from the special order is over and above the relevant cost of producing it.

The relevant variable cost will be determined as follows

Unit variable cost =5.20+ 3 +2.30+ 1.30= 11.8

Special machine= 16,000

$

Sales from special order (2,800× $32) = 89,600

Variable cost ( 2800 × $11.8)= (30,000 ) (33,040)

Investment in special machine (16,000)

Financial advantage 40,560

Note that the fixed manufacturing overheads were not included in the analysis, simply because they are not relevant. In other words, whether or not the special order is accepted these fixed costs would be concurred either way.

Financial advantage $40,560