Question

A customer has requested that Lewelling Corporation fill a special order for 1,900 units of product S47 for $41 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $16.00: Direct materials $ 4.30 Direct labor 4.00 Variable manufacturing overhead 1.40 Fixed manufacturing overhead 6.30 Unit product cost $ 16.00 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 $2.20 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

Profit from sale of special order = $77,900 - $33,610 = $44,290

Step-by-step explanation:

Being a special order and an added opportunity to its regular sales of S47, we will be looking at the Marginal Costs of accepting to produce the order:

Direct Material = $4.30

Direct Labour = $4.00

Variable Overhead = $3.60

Fixed Manufacturing Overhead = $6.30

Total Costs = $18.20

But, Fixed Costs is already covered/absorbed by our existing business; as such we need not include it in the costing of the special order

And there is an Additional investment in moulds = $11,000

Total cost of special order = ($18.20 - $6.30) x 1,900 units + $11,000

= $33,610

Sales of special order = 1,900 units x $41 =$77,900

Profit from sale of special order = $77,900 - $33,610 = $44,290