Assume a company manufacturing many products, one of which normally sells for $48 per unit. The...

Assume a company manufacturing many products, one of which normally sells for $48 per unit. The company’s accounting system reports the following unit product cost for this product:

	Per Unit
Direct materials		$	18
Direct labor			12
Manufacturing overhead			10
Total cost		$	40

The company estimates that $3 of its manufacturing overhead varies with respect to the number of units produced. The remainder of its overhead is fixed and unaffected by the volume of units produced within the relevant range.

A customer has approached the company with an offer to buy 300 units of a customized version of the product mentioned above for $39. The company can fulfill this order using existing manufacturing capacity. To accommodate the customer’s desired product design, the company would incur additional direct materials cost per unit of $3. It would also have to buy a special tool for $560 that has no other use or resale value after the special order is completed. Assuming that accepting this order will not have any effect on sales to other customers, what is the financial advantage (disadvantage) of accepting the special order?

Solutions

Expert Solution

Answer---------

Financial Advantage

$ 340

Working

Calculation of Additional Cost of Order
	Per Unit	Total
Direct material	$ 21.00	$ 6,300
Direct labor	$ 12.00	$ 3,600
Variable manufacturing overheads	$ 3.00	$ 900
Additional fixed cost		$ 560.00
Total Additional cost due to acceptance of order	$ 36.00	$ 11,360

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (300 x $39)	$ 11,700
Less: Total Additional cost due to acceptance of offer	$ 11,360
Financial Advantage	$ 340

ekkarill92 answered 1 year ago

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