Question

Elfalan Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 52,000 units per month is as follows:

	Per Unit
Direct materials	$	48.60
Direct labor	$	9.30
Variable manufacturing overhead	$	2.30
Fixed manufacturing overhead	$	19.70
Variable selling & administrative expense	$	4.20
Fixed selling & administrative expense	$	20.00

The normal selling price of the product is $110.10 per unit.

An order has been received from an overseas customer for 3,200 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $2.40 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $88.40 per unit. The monthly financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Garrison 16e Rechecks 2017-12-15

Multiple Choice

• $84,480

• ($63,000)

• $21,440

• ($50,240)

Answer 1

Ans) (a) $84,480

Calculation of Financial Advantage (Disadvantage) for the Company If it accepts new order of 3,200 Units

Particulars	Amount ($)
Incremental Revenue….(A)	$2,82,880 (3,200 Units*$88.40)
Incremental Costs
Direct Material	$1,55,520 (3,200 Units*$48.60)
Direct Labor	$29,760 (3,200 Units*$9.30)
Variable Manufacturing Overheads	$7,360 (3,200 Units*$2.30)
Fixed Manufacturing Overheads	-
Variable Selling & Administrative Expense	$5,760 (3,200 Units*$1.80) ($4.20-$2.40)
Fixed Selling & Administrative Expense	-
Total Incremental Costs….(B)	$1,98,400
Financial Advantage (Disadvantage)… (C)=(A)-(B)	$84,480

In this case, Elfalan Corporation will get an additional profit of $84,480 if it accepts new order of 3,200 Units. Therefore Elfalan Company should accept order of 3,200 Units.

For Understanding Purpose

Company having Idle Capacity

Please note that the question clearly specifies that company has adequate idle capacity to accept & produce 3,200 Units. So we have directly calculated Financial advantage to the company as shown above.

Company don't have sufficient Idle Capacity

If the Company doesn't have idle capacity it has to sacrifice the current sales which will lead to loss of current contribution. The said contribution loss will be taken in to account under Incremental cost and will be reduced from Incremental revenue to arrive at Financial Advantage(Disavantage).