In: Accounting
SWIN Ltd manufacturers a number of specialised electronic components, including ALPHA Sensors. SWIN Ltd has the capacity to produce 10,000 units of ALPHA per year. Currently it is operating at 80 per cent capacity. The selling price for ALPHA is $100 per unit. The variable cost per unit is $39. Fixed cost allocated to producing Alpha is $100,000 per year. SWIN Ltd receives a special order for 3,000 units of ALPHA. The opportunity cost associated with taking this special order is:
Working Notes: 1 | |||
CALCULATION OF THE CONTRIBUTION PER UNIT | |||
Particulars | Amount | ||
Selling Price Per unit | $ 100 | ||
Less: Variable Cost Per | $ 39 | ||
Contribution Per Unit | $ 61 | ||
Working Notes: 2 | |||
CALCULATION OF UNIT REDUCED FROM CURRNET PRODUCTION FOR ACCEPTING THE PROJECT | |||
Capacity to Produce = | 10,000 | Units | |
Capacity utilization | 80% | ||
Currently producing (10,000 Units X 80%) | 8,000 | Units | |
Spare capacity = 20% = (10,000 Units X 20%) | 2,000 | Units | |
Special Order received | 3,000 | Units | |
Utilization from current production = 3000 - 2000 units = | 1,000 | Units | |
Solution: | |||
Calculation of Opportunity Cost assoicated with taking this special order | |||
Utilizing from the sales of current Production | 1,000 | Units | |
X | "X" By | ||
Contribution Margin Per unit | $ 61 | ||
Opportunit Cost + (1000 Units X $ 61) | $ 61,000 | ||
Answer = Opportunity Cost = $ 61,000 | |||