Question

Franklin Sports received a special order for 1,000 units of its bicycles at a selling price of $250 per bike. Franklin has enough extra capacity to accept the order. No additional selling costs will be incurred. Unit costs to make and sell this product are as follows: direct materials, $100; direct labor, $70; variable manufacturing overhead, $10; fixed manufacturing overhead, $15, and variable selling costs, $3. A special machine would have to be purchased for $5,000 to fulfill this order. What should be the amount of total relevant costs for this special order?

Answer 1

Relevant costs are those costs which can be avoided if the special order is not taken, therefore, become important in decision making.

Relevant costs = Units × (Material cost per unit + Labor cost per unit + Variable overhead cost) + Machine cost

                           = 1,000 × (100 + 70 + 10) + 5,000

                           = 1,000 × $180 + $5,000

                           = $180,000 + $5,000

                           = $185,000 (Answer)

Note: (1) fixed cost can’t be avoided; therefore, this is not a relevant cost.

(2) There would be no selling cost, since the order is received already.