Question

Mercury Skateboard Company manufactures skateboards. Several weeks ago, the firm received a special-order inquiry from Venus, Inc. Venus desires to market a skateboard similar to one of Mercury’s and has offered to purchase 11,000 units if the order can be completed in three months. The cost data for Mercury’s Champion model skateboard follow. Direct material $ 16.40 Direct labor: .25 hours at $18.00 4.50 Total manufacturing overhead: .5 machine hours at $40.00 20.00 Total $ 40.90 The following additional information is available. • The normal selling price of the Champion model is $53.00; however, Venus has offered Mercury only $31.50 because of the large quantity it is willing to purchase. • Venus requires a modification of the design that will allow a $4.20 reduction in direct-material cost. • Mercury’s production supervisor notes that the company will incur $7,400 in additional setup costs and will have to purchase a $4,800 special device to manufacture these units. The device will be discarded once the special order is completed. • Total manufacturing overhead costs are applied to production at the rate of $40 per machine hour. This figure is based, in part, on budgeted yearly fixed overhead of $1,500,000 and planned production activity of 60,000 machine hours (5,000 per month). • Mercury will allocate $3,600 of existing fixed administrative costs to the order as “. . . part of the cost of doing business.”

1. Calculate the net profit increase or (decrease) from accepting the special order.

2. Assume that Mercury’s current production activity consumes 70 percent of planned machine-hour activity. Calculate the current available machine-hours

Answer 1

a	Net profit increase or decrease for accepting the special order
	Differencial Analysis
		Per unit	for 11000 units
	Differencial Revenue	$35.10	$386,100
	Less: Variable costs
	Direct material	$12.20	$134,200
	Direct labour	$4.50	$49,500
	Variable overheads	$7.50	$82,500
	Total Variable cost	$24.20	$266,200
	Contribution Margin	$10.90	$119,900
	Less:Additional Fixed cost
	Set up cost		$7,400
	Special device		$4,800
	Addittional income (loss) from special order		$107,700
	The fixed administrative cost is irrelevant because it will be incurred whether
	order is accepted or not
	Variable manufacturing overhead
	Budgeted fixed overhead	$1,500,000
	Planned production activity in machine hours	60000
	Fixed overhead per hour	$25
	Manufacturing overhead per hour	$40
	Fixed overhead per hour	$25
	Variable overhead per hour	$15
b	Current available machine hours
	Planned production activity (5000 x 3)	15000
	Current usage - 70%	10500
	Current available machine hours	4500