4). Grill Time sells its barbecue sets for $170 each. Suppose the company incurs the following...

4). Grill Time sells its barbecue sets for $170 each. Suppose the company incurs the following average cost per barbecue set:

Direct materials $52

Direct labor 28

Variable manufacturing overhead 11

Variable selling expenses 5

Fixed manufacturing overhead* 24 Total cost $120

* $ 1,800,000 / 75,000 units

Grill Time has enough idle capacity to accept a one-time-only special order from Backyard Living, Inc. for 2,000 barbecue sets at a sales price of $130 per set. Grill Time will not incur $2 of variable selling expenses for this order.

How would accepting the order affect Grill Time's operating income?

Solutions

Expert Solution

Variable expense is an expense varies with level of units sold/produced thus it is relevant while making any decision since it results in incremental cost .

Variable cost per unit incurred in case special offer is accepted :52+28+11+(5-2)

= 52+28+11+3

= 94

Fixed cost remain constant irrespective of level of units produced /sold thus it is irrelevant while making any decision (unless any incremental cost is incurred or it is avoidable]

Incremental revenue from special offer (2000*130)	260000
less:variable cost [94*2000]	(188000)


Incremental profit /(loss)	72000

Operating income will increase by 72000 from acceptance of offer.

**since there is enough idle capacity available ,there is no loss of regular sales.

ekkarill92 answered 3 months ago

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