Question

The following are Hibiscus Company's cost of making and selling an item:

Description Amount per unit
Direct materials $9
Direct labor $4
Variable manufacturing overhead $2
Fixed manufacturing overhead $5
Variable selling and administrative $2
Fixed selling and administrative $8

A one-time only special order has been received for 600 units. The company has capacity to accept the oder and it would not affect regular sales. The sales price for the special order is 26 per unit. Total fixed costs would not be affected by this order. The variable selling and administrative costs would have to be incurred for this special order. The order would require an additional $3 per unit for specialized materials and a new machine that costs $2,000. What is the financial advantage or disadvantage of accepting the special order?

Answer 1

$2,800 financial advantage

Step-by-step explanation:

We consider incremental costs and revenues in our analysis for the effects of accepting the special order.

Analysis of effects of accepting the special order :

Sales - Incremental (600 units x $26) $15,600

Less Incremental Costs :

Direct materials ($9 x 600 units) ($5,400)

Direct labor ($4 x 600 units) ($2,400)

Variable manufacturing overhead ($2 x 600 units) ($1,200)

Specialized materials ($3 x 600 units) ($1,800)

Machine Cost ($2,000)

Financial Advantage / (Disadvantage) $2,800

therefore,

the financial advantage of accepting the special order is $2,800