In: Accounting
1.
Alternative 1 | Alternative 2 | Increase ( decrease) in Profit | |
Reject Special Order | Accept Special Order | ||
Incremental Sales Revenue | $ 0 | $ 13,200 | $ 13,200 |
Less: Incremental costs | |||
Direct materials | 0 | 2,662 | (2,662) |
Direct labor | 0 | 1,012 | (1,012) |
Variable manufacturing overhead | 0 | 4,818 | (4,818) |
Cost of modification | 0 | 460 | (460) |
Total Costs | 0 | 8,952 | 8,952 |
Profit | 0 | $ 4,248 | $ 4,248 |
Incremental profit of accepting the special order : $ 4,248
Fixed manufacturing overhead costs are not relevant, as they would be incurred regardless of whether the special order is accepted or not.
2. Yes, MSI should accept the special order.
3. Incremental profit ( loss ) = Incremental Revenue - Incremental Costs = $ ( 2,200 x 2.50) - $ ( 2,200 x 3.86 + 460) = $ 5,500 - $ 8,952 = $ ( 3,452) loss
4. Contribution margin lost from history program sales ( opportunity cost ) = 2,200 x $ ( 13.00 - 3.86) = $ 20,108
Now, total cost for the special order = $ 8,952 + $ 20,108 = $ 29,060
Break-even price = $ 29,060 / 2,200 = $ 13.21
The special order price at which MSI would be indifferent between accepting or rejecting the special order: $ 13.21