Question

Jones Products manufactures and sells to wholesalers approximately 500,000 packages per year of underwater markers at $3.80 per package. Annual costs for the production and sale of this quantity are shown in the table.

Direct materials	$	640,000
Direct labor		160,000
Overhead		480,000
Selling expenses		200,000
Administrative expenses		133,000
Total costs and expenses	$	1,613,000

A new wholesaler has offered to buy 83,000 packages for $3.42 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’ sales through its normal channels. A study of the costs of this additional business reveals the following:

Direct materials costs are 100% variable.

Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require overtime pay at 1½ times the usual labor rate.

20% of the normal annual overhead costs are fixed at any production level from 450,000 to 600,000 units. The remaining 80% of the annual overhead cost is variable with volume.

Accepting the new business would involve no additional selling expenses.

Accepting the new business would increase administrative expenses by a $5,000 fixed amount.

Answer 1

Answer:

Overhead = $480,000

20% of the normal annual overhead costs are fixed = $480,000 * 20% = $96,000

Variable overhead per unit = ($480,000 - $96,000) / 500,000 = $0.768

Calculation of per unit cost total cost given for 500,000 units us as follows:

Special offer received to buy 83,000 packages for $3.42 each:

Relevant costs are:

Direct material cost per unit = $1.280

Per unit direct labor costs for the additional units would be 50% higher than normal = $0.320 *1.5 =$0.480

Variable overhead per unit = $0.768

Accepting the new business would involve no additional selling expenses.

Accepting the new business would increase administrative expenses by a $5,000 fixed amount.

As such incremental costs per unit for the special order will be as follows:

Jones Products manufactures should accept offer of new wholesaler buy 83,000 packages for $3.42 each. since

• the offer price at $3.42 each is higher than the incremental cost per unit at $2.59
• These markers would be marketed under the wholesaler’s name and would not affect Jones Products’ sales through its normal channels