Question

Sales (7,000 safety checks) $560,000

Production costs (7,010 safety checks)

Direct labor 392,560

Shop overhead

Variable 89,728

Fixed 56,080

Operating expenses

Variable 16,824

Fixed 12,800

c. Assume that you must decide quickly whether to accept a special one-time order for 20 safety checks on local police cars for $64 per safety check. Which income statement presents the most relevant data? Answer Determine the apparent profit or loss on the special order based solely on these data. Use a negative sign with your answer if the special order creates an apparent loss. Round answer to the nearest whole number.

Answer 1

Income statement
Sales in units	7,000
Production in units	7,010
Sales per unit($560,000/7,000 units)	$80
Less:Variable costs:
Direct labour per unit($392,560/7010 units =$56
Variable Shop OH per unit($89,728/7010 =$12.80
Variable operating expense per unit($16,824/7010 =$2.40	$71.20
Contribution margin per unit	$8.80
Contribution margin(7000 units*8.80)	$61,600
Less:Fixed costs:
Fixed Shop OH =$56,080
Fixed operating expense=$12,800	$68,880
Net Income/(Loss)	($7,280)
Now there is special order for 20 safety checks, but there is a excess capacity of just 10 safety checks
so for the other 10 it has to sacrifice the contribution earned on the 10 units.so the Opportunity cost
will be 10 units * $8.80 =$88.00.Also fixed cost will be ignored for decision making.
So the Contribution earned on special order =$64.00 - $71.20=($7.20)
Contribution on 20 units =($7.20)*20 units =($144) - $88(opportunity cost) =($232)
So to accept the order of 20 safety check there is a loss of $232