Question

Mcniff Corporation makes a range of products. The company's predetermined overhead rate is $25 per direct labor-hour, which was calculated using the following budgeted data:

Variable manufacturing overhead	$	84,000
Fixed manufacturing overhead	$	441,000
Direct labor-hours		21,000

Management is considering a special order for 670 units of product O96S at $61 each. The normal selling price of product O96S is $72 and the unit product cost is determined as follows:

Direct materials	$	34.00
Direct labor		9.00
Manufacturing overhead applied		25.00
Unit product cost	$	68.00

If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order.

Required:

The financial advantage (disadvantage) for the company as a result of accepting this special order would be:

Answer 1

The same fixed cost will incur with or without the acceptance of the 670 unit order. If there were any additional fixed cost incurred they would have been added in the cost of order. But as the company operates in the normal capacity even with the new order the fixed costs remain constant. therefore for decision purposes only the variable cost is included.

Calculation of variable manufacturing overhead calculation per unit

Given total variable manufacturing overhead = $84000

Total labor hours = 21000

Variable manufacturing per labour hour = 84000/21000 which is equal to $4.

PARTICULAR	AMOUNT
Sales revenue (670*$61.00)	$40870
less variable costs
Direct material (670*34.00)	$22780
direct labor (670*$9)	$6030
variable manufacturing overhead (670*$4)	$2680
total variable cost	$31490
contribution /profit from order (sales - total variable cost)	$9380

As the company earns a profit of 9380 from the order of additional 670 units produced under normal capacity.The company should accept the order. We have not considered the fixed cost in this order to calculate the profit because the fixed cost will remain same even if the order is not accepted.

The advantage of accepting the order is that the profit increases by $9380.