Question

In: Accounting

Wallyworld Company manufactures a product with the following costs per unit at the expected production level...

Wallyworld Company manufactures a product with the following costs per unit at the expected production level of 84,000 units:

Direct materials $12

Direct Labor 36

variable manufacturing overhead 18

fixed manufacturing overhead 24

The company has the capacity to produce 90,000 units. The product regularly sells for $120. If a wholesaler offered to buy 4,500 units for $100 each, the effect of the special order on income would be a

a. $450,000 increase

b. $45,000 increase

c. $153,000 increase

d. $90,000 decrease

Expert Solution

Solution : Option "C" - 153000USD Increase

This is the case where company has received a SPECIAL ORDER for buying 4500 units at 100USD each

In order to accept a Special Order , we have to assess whether the incremental cost (due to incremental production) is getting set off with incremental revenue(incremental revenue on special order).

The company has already had 90000 units production capacity over and above estimated 84000 units capacity.

All the Fixed manufacturing over heads are already absorbed fully by total capacity of production . There is no need to recover fixed overheads from specail order sale .

The company being having extra production capacity can accept special order and should be able to recover the material , labour and Variable overhead costs

The special order has to recover the Total Variable costs incurred

Special order cost = DM + DL + Variable manufacturing Over head

= 12 + 36 + 18

= 66 per unit

Special sale price = 100 per unit

Increase in revenue = sale value (4500 * 100) - cost (4500 * 66)

450000 - 297000

= 153000

ekkarill92 answered 2 years ago

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