Question

6-9

Munchies Metal Works received an offer from a big-box retail company to purchase 3,400 metal outdoor tables for $230 each. Munchies Metal Works accountants determine that the following costs apply to the tables:

Direct material			$130
Direct labor			40
Manufacturing overhead			67
	Total		$237

Of the $67 of overhead, $15 is variable and $52 relates to fixed costs. The $52 of fixed overhead is allocated as $1.30 per direct labor dollar.

What will be the real effect on profit if the order is accepted?

Will the profit increase or decrease? and by how much?

Answer 1

What will be the real effect on profit if the order is accepted?

Sales( 3400*230)	782,000.00
Less: Variable Cost
Direct Material (130*3400)	442,000.00
Direct Labour(40*3400)	136,000.00
Manufactring Overhead(15*3400)	51,000.00
Operating Income	153,000.00
No. of Units	3,400.00
Opering Profit per unit	45.00

Fixed overhead is called period cost and are expected to remain same for the range of unit of production.

So the Fixed cost is not considered in the above calculation.

Yes the profit will increase by 153,000.

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