Question

Gallerani Corporation has received a request for a special order of 5,100 units of product A90 for $27.30 each. Product A90's unit product cost is $26.95, determined as follows: Direct materials $ 2.75 Direct labor 8.05 Variable manufacturing overhead 7.15 Fixed manufacturing overhead 9.00 Unit product cost $ 26.95 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 A90 that would increase the variable costs by $3.70 per unit and that would require an investment of $26,000 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= $2,815

Step-by-step explanation:

The amount of the financial advantage or disadvantage would be determined as follows:

Unit variable cost of order = 2.75+8.05 +7.15 + 3.70 = 21.65

$

Sales from special order ($27.30× ,5100) 139,230

Variable cost of special order $ (21.65 × 5100 \ (110,415 )

Contribution from special order 28,815

Cost of special machine ( 26,000)

Increase in contribution 2,815

The annual financial advantage= $2,815

Note the fixed manufacturing overhead are irrelevant, they are cost that would be incurred whether or not the order is accepted