Question

At the end of September, Northern Manufacturing received another special order from USD International. This special order offers to buy 750 ft2 of leather for $12.75 per square feet in October. However, since accepting this special order will exceed the leather processing capacity of Northern Manufacturing, another machine will be required to increase the capacity to 4,000 ft2 per month which will increase the fixed manufacturing costs by $3,000.

Upon review of October’s production data of Northern Manufacturing, you have compiled the following information (excluding special order):

• Selling price per unit = $14.50

• Direct materials cost per unit = $1.36

• Labor cost per unit = $2.36

• Variable manufacturing overheads per unit = $3.00

• Variable selling overheads per unit = $2.31

• Fixed manufacturing overheads = $ 4,000

• Fixed selling overheads = $ 2,750

• Units produced and sold = 1,500 ft2

PART B (15 points): Use the information provided above to conduct a differential analysis for October and decide whether Northern Manufacturing should accept the special order from USD International or not.

		Regular orders	Special order
Selling price per unit		$14.50
Direct materials cost per unit		$1.36
Labor cost per unit		$2.36
Variable manufacturing overheads per unit		$3.00
Variable selling overheads per unit		$2.31
Fixed manufacturing overheads		$            4,000
Fixed selling overheads		$            2,750
Units produced and sold		1,500 ft^2
Northern Manufacturing
Differential Analysis
August 31, 20X1
		Status Quo:	Alternative:
		Reject Special Order	Accept Special Order	Difference
Sales revenue				$                 -
Less Variable costs
	Direct materials costs			$                 -
	Labor costs			$                 -
	Variable manufacturing overheadss			$                 -
	Variable selling overheadss			$                 -
Total contribution				$                 -
Less Fixed costs
	Fixed manufacturing overheads			$                 -
	Fixed selling overheads			$                 -
Operating profit (before taxes)				$                 -

Answer 1

		Regular orders	Special order
Selling price per unit		$14.50	12.75
Direct materials cost per unit		$1.36	$1.36
Labor cost per unit		$2.36	$2.36
Variable manufacturing overheads per unit		$3.00	$3.00
Variable selling overheads per unit		$2.31	$2.31
Fixed manufacturing overheads		$            4,000	3000
Fixed selling overheads		$            2,750	0
Units produced and sold		1,500 ft^2	750 sq. feet

Differential Analysis
		Status Quo:	Alternative:
		Reject Special Order	Accept Special Order	Difference
Sales revenue		21750	31,312.5	9562.5
Less Variable costs
	Direct materials costs	$2,040.00	3,060.0	$1,020.00
	Labor costs	$3,540.00	5,310.0	$1,770.00
	Variable manufacturing overheadss	$4,500.00	6,750.0	$2,250.00
	Variable selling overheadss	$3,465.00	5,197.5	$1,732.50
Total contribution		$8,205.00	10,995.0	$2,790.00
Less Fixed costs
	Fixed manufacturing overheads	4000	7,000.0	3000
	Fixed selling overheads	2750	2,750.0	0
Operating profit (before taxes)		$1,455.00	1,245.0	($210.00)

hence, the order should not be accepted since decrease in profit