Question

Explorer Company has an annual plant capacity of 3,000 units. Data concerning this product are given below: Direct Materials cost per unit $ 20.00 Direct Labor cost per unit $ 8.00 Variable manufacturing overhead cost per unit $ 5.00 Variable sales commissions per unit $ 6.00 Fixed selling and administration expenses per unit $ 9.00 $ 48.00 Currently, the sales volume at the regular selling price of $75 is 2,500 units per year. The company has received a special order for 500 units at a selling price of $45 each. Regular sales would not be affected, and sales commissions on the 500 units would only be 2/3 of the regular sales commission per unit for this special order. This special order would have no impact on total fixed costs. Required: a. Determine whether the company should accept the special order. Explain in your own words your decision and show all computations. b. Would your answer change if the current sales volume was 3,000 units per year and you could not accept the special order without reducing production of normal units at the regular $75 selling price. Explain your answer and show calculations to support your answer.

Answer 1

Explorer company
Part a
SP	45
Less:- VC
DM	20
DL	8
Var. Mfg. OH	5
Var. sales commission ( 6 * 2/3 )	4
Contribution margin	8
Units	500
Incremental income	4000
The order should be accepted as it increases the company's profits by $ 4000.
Part b
SP	45
Less:- VC
DM	20
DL	8
Var. Mfg. OH	5
Var. sales commission ( 6 * 2/3 )	4
Contribution margin	8
Units	500
Incremental income	4000
Loss in CM from regular sales:-
500 * ( 75 - 20 - 8 - 5- 6 )	-18000
Loss	-14000
Yes, my decision changes and the order should not be accepted as hampering the regular sales
resulted in big loss for the company.