Question

Apex Company produces artificial Christmas trees. A local shopping mall recently made a special order offer; the shopping mall would like to purchase 200 extra-large white trees. Apex Company is currently producing and selling 20,000 trees; the company has the excess capacity to handle this special order. The shopping mall has offered to pay $120 for each tree. An accountant at Apex Company provides an estimate of the unit product cost as follows:

Direct materials $50.00

Direct labor (variable) $3.50

Variable manufacturing overhead $1.00

Fixed manufacturing overhead $4.00

Total unit cost $14.50

This special order would require an investment of $10,000 for the molds required for the extra-large trees. These molds would have no other purpose and would have no salvage value. The special order trees would also have an additional variable cost of $6.00 per unit associated with having a white tree. This special order would not have any effect on the company's other sales.

Should Apex accept the order? What is the effect on net operating income of accepting the order?

Answer 1

It is profitable to accept the special offer.

Step-by-step explanation:

Giving the following information:

The shopping mall would like to purchase 200 extra-large white trees. Apex Company has the excess capacity to handle this special order. The shopping mall has offered to pay $120 for each tree.

Variable costs:

Direct materials $50.00

Direct labor (variable) $3.50

Variable manufacturing overhead $1.00

Additional variable cost= $6

This special order would require an investment of $10,000 for the molds required for the extra-large trees.

Because it is a special offer and there is unused capacity, we will not have into account the fixed costs (except the incremental fixed cost).

Unitary variable cost= 50 + 3.5 + 1 + 6= $60.5

Fixed costs= 10,000

Incremental income= (200*120) - (200*60.5) - 10,000= $1,900

It is profitable to accept the special offer.