In: Accounting
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?
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 |