Question

In: Accounting

Costs for Product Y Direct material $90 Direct labo

Costs for Product Y

Direct material $90

Direct labor 45

Variable Factory Overhead 35

Variable Selling Costs 5

Fixed Factory Overhead* 30

Fixed Selling Costs* 10

Total Cost per unit $215

*Reflects common (allocated) costs that will not change with special order

Capacity = 200,000 units, currently producing 120,000 units

The normal selling price per unit = $250

The special order: A customer outside the normal market offers to purchase 60,000 units of Product Y. Variable selling costs will be avoided with the special order.

Does the firm have the excess capacity to meet the special order?
What are the relevant costs for Product Y when considering the special order?
Should the firm accept the special order if the customer is willing to pay $180 per unit for Product Y? If the order is accepted, what would be the incremental profit (loss)?
What are the relevant costs if this order involves a special label and packaging for Product Y? The special labeling will require a new $120,000 machine (only to be used on this order) and a variable cost of $5 per unit for the materials needed for the label. The special packaging will add an additional $5 of cost to the product.

Considering the information in (4) above, should the firm accept the special order at a price of $180?
What is the minimum price that the firm could accept for the special order of Product Y when considering the information in (4) above?

Solutions

Expert Solution

Does the firm have the excess capacity to meet the special order?

Answer: - Yes, the firm has excess capacity to meet special order.

Its total capacity is 200,000 units out of which it is currently producing only 120,000 units and 80,000 units still left unutilized whereas special order is of 60,000 units.

2. What are the relevant costs for Product Y when considering the special order?

Answer:- Relevant cost for Producing 60,000 units of Special Order for Product Y

Direct material $90

Direct labor $45

Variable Factory Overhead $35

Variable Selling Cost of $5 will not be part of cost as specifically mentioned in question.

Fixed Factory Overhead of $30 & Fixed Selling cost of $10 will be incurred irrespective of number of units produced so not included in 'relevant cost' for Product Y special order.

3. Should the firm accept the special order if the customer is willing to pay $180 per unit for Product Y? If the order is accepted, what would be the incremental profit (loss)?

Answer :

Total Additional Cost for Producing Special order of Product Y ( as mentioned in part 2 above) is

=Direct Material + Direct Labour + Variable Factory Overhead

= 90+45+35 = $170 per unit.

Hence it is clearly evident that Selling Price of $180 greater than cost of $170.

Yes the firm should accept the special order if the customer is willing to Pay $180 per unit for Product Y.

Incremental Profit = $180 - $170 = $10 per unit

Total Incremental Profit = 60,000 units * $10 = $600,000

4. What are the relevant costs if this order involves a special label and packaging for Product Y? The special labeling will require a new $120,000 machine (only to be used on this order) and a variable cost of $5 per unit for the materials needed for the label. The special packaging will add an additional $5 of cost to the product.

Answer :

New Relevant Cost = Direct Material + Direct Labour + Variable Factory Overhead+ New Machine Cost +Variable Cost of Material for label + Special Packaging Cost

= 90 + 45 + 35 + 20 ($120,000/60,000) + 5 + 5 = $200 per unit for 60,000 units

5. Considering the information in (4) above, should the firm accept the special order at a price of $180?

Anwer : Considering the information in (4) above, total New Cost of Special Order will be $200 per unit.

Hence the firm should not accept the special order at a price of $180 as it is less than Cost which will result in loss of $20 per unit.

6. What is the minimum price that the firm could accept for the special order of Product Y when considering the information in (4) above?

Answer : The minimum price that the firm could accept for the special order of Product Y should cover its cost of production i.e $ 200 per unit.

If the firm charges $200 per unit it will neither incur profit nor loss.

ekkarill92 answered 1 year ago

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