Question

A customer has requested that Lewelling Corporation fill a special order for 2,100 units of product S47 for $26 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $19.20:

Direct materials $ 5.70
Direct labor 3.00
Variable manufacturing overhead 2.80
Fixed manufacturing overhead 7.70
Unit product cost $ 19.20
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 $11,000.00 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

The annual financial advantage for the company as a result of accepting this special order should be: $16,720

Step-by-step explanation:

Fixed Manufacturing Overheads are irrelevant for this decision since The company has ample spare capacity for producing the special order and no need to alter existing capacity.

Incremental Costs and Revenues - special order

Sales ( 2,100 units × $26 ) 54,600

Direct materials ( 2,100 units × $ 5.70 ) (11,970)

Direct labor ( 2,100 units × $3.00 ) ( 6,300)

Variable manufacturing overhead ( 2,100 units ×$2.80) (5,880)

Incremental Variable Cost ( 2,100 units × $1.30) ($2,730)

Investment in Special Molds ($11,000)

Incremental Income/(loss) $16,720

Therefore, The annual financial advantage will be $16,720

Answer 2

Annual Financial advantage $ 550

Step-by-step explanation:

Computation of income/loss on special order

Unit product costs

Normal product costs $ 19.20

Incremental variable costs $ 1.30 per unit $ 1.30

Total product costs $ 20.50

Revenues per unit $ 26.00

Profit per unit $ 5.50

Sales Units 2,100 units

Total incremental profit on order $ 11,550

Less; cost of moulds $ 11,000

Incremental profit on S 47 order $ 550