Hyde Farms Per Unit Direct materials $19 Direct labor $11 Variable overhead $6 Fixed overhead $9...

Hyde Farms Per Unit Direct materials $19 Direct labor $11 Variable overhead $6 Fixed overhead $9 Total $45 Hydes Hyde Farms Inc. a US based firm located in Topeka, Kansas has a capacity of 95,000 units. The are currently producing and selling 90,000 units at $50 per unit. The cost of a unit at the present production level is provided in the analysis above. An order for 10,000 units has just been received from Von Boom Corp (a domestic business based in Belgium) at a price of $42 per unit. Freight costs of $2 per unit would be required (paid by Hyde) for international shipping. Should Hyde accept the order from Von Boom?

Expert Solution

No , Hyde Farms Inc. should not accept the order from Von Boom.

If Hyde accepts the order from Von Boom, net operating income will decrease by $ 30,000.

Workings :

In order to accommodate the special order of 10,000 units, Hyde Farms would need to forego 5,000 of its regular orders, since its capacity is only 95,000 units.

Total relevant cost per unit for the international order:

Direct Materials	$ 19
Direct Labor	11
Variable Overhead	6
Freight	2
Total Relevant Cost	$ 38

Contribution margin per unit = $ 42 - $ 38 = $ 4

Total contribution margin from the special order = 10,000 x $ 4 = $ 40,000.

Contribution margin lost from regular orders = $ ( 50 - 36) x 5,000 = $ 70,000.

Therefore, net advantage ( disadvantage) of accepting the special order = $ 40,000 - $ 70,000 = $ ( 30,000)

Note: The fixed overhead of $ 9 per unit would be incurred regardless of whether the special order is accepted or not. Therefore, it is not a relevant cost for decision making in this case.

ekkarill92 answered 2 years ago

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