Lakeside Inc. produces a product that currently sells for $78.00 per unit. Current production costs per...

Lakeside Inc. produces a product that currently sells for $78.00 per unit. Current production costs per unit include direct materials, $30; direct labor, $32; variable overhead, $15.00; and fixed overhead, $15.00. Product engineering has determined that certain production changes could refine the product quality and functionality. These new production changes would increase material and labor costs by 20% per unit. Lakeside has received an offer from a nonprofit organization to buy 10,000 units at $78.00 per unit. Lakeside currently has unused production capacity.

Required:
a. Calculate the effect on Lakeside's operating income of accepting the order from the nonprofit organization.

Expert Solution

Effect of special order = $10,000 increase in income

Financial Advantage of accepting order

$ 10,000

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (10000 x $78)	$ 780,000
Less: Total Additional cost due to acceptance of offer	$ 770,000
Financial Advantage	$ 10,000

.

Calculation of Additional Cost of Order
	Per Unit	Total
Direct material	$ 30.00	$ 300,000
Direct labor	$ 32.00	$ 320,000
Variable manufacturing overheads	$ 15.00	$ 150,000
Total Additional cost due to acceptance of order	$ 77.00	$ 770,000

Alternate answer---------Assuming the cost of labor and material is also increased for special order. = Decrease in income of $114,000

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (760 x $70)	$ 780,000
Less: Total Additional cost due to acceptance of offer	$ 894,000
Financial Disadvantage	-$ 114,000

.

Calculation of Additional Cost of Order
	Per Unit	Total
Direct material	$ 36.00	$ 360,000
Direct labor	$ 38.40	$ 384,000
Variable manufacturing overheads	$ 15.00	$ 150,000
Total Additional cost due to acceptance of order	$ 89.40	$ 894,000

ekkarill92 answered 1 year ago

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