Question

Carney Corporation has received a request for a special order of 4,000 units of product F65 for $27.60 each. Product F65's unit product cost is $25.80, determined as follows:

Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product F65 that would increase the variable costs by $4.00 per unit and that would require an investment of $20,000 in special molds that would have no salvage value.

This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

Required:

1. Prepare an incremental analysis for the special order.

2. Should Carney Company accept the special order?

Answer 1

Increamental Analysis for the Special Order
Units	4,000
Particulars	in $	Working Comments
Increamental Contribution due to acceptance the order	7,200	4000*(27.60-25.80)
Less : Additional V.C due to acceptance the order	16,000	4000*4 (Due to Modification)
Less: Additional Specific order based Fixed Cost	20,000	Additional specific Cost
Increase/(decrease) in Contribution	-28,800
Working Notes:
1. In Increamental Approach only additional revenue and costs are considered
2. There is enough ample capacity hence there will be no opportunity cost on account of it.
Conclusion:
Since there is loss of $ 28,800 in accepting the order, hence the order shall NOT be accepted by Carney Company.