Question

Fitzgerald Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 80,000 units per month is as follows:

Direct Materials $26.30

Direct Labor $4.10

Variable Manufacturing Overhead $2.00

Fixed Manufacturing Overhead $11.00

Variable Selling and Administrative Expense $2.00

Fixed Selling and Administrative Expense $10.10

The normal selling price of the product is $55.90 per unit. Direct Labor is a variable Cost in this company. The company has excess capacity buy only enough to accept one of the special orders below.

Special Order #1

An order has been received from an overseas customer for 1,900 units to be delivered this month at a special discounted price. The order would have no effect on the company's normal sales and would not change the total amount of the company's fixed cost. The variable selling and administrative expense would be $0.95 less per unit on this order than on normal sales. The customer has offered to pay $51.50 per unit.

Special Order #2

An order has been received from an overseas customer for 2,300 units to be delivered this month at a special discounted price. This order would have no effect on the companys normal sales but would increase the total amount of the company's fixed cost by $1,500. The variable selling and administrative expense remain at the normal cost per unit. The customer has offered to pay $53.50 per unit.

Special Order #3

An order has been received from an overseas customer for 2,100 units to be delivered this month at a special discounted price. This order would have no effect on the companys normal sales but would increase the total amount of the company's fixed cost by $4,100. The variable selling and administrative expense would be $0.75 less per unit on this order than on normal sales. The customer has offered to pay $54.75 per unit.

Required: Create an analysis of each special order including the incremental revenue, incremental cost, total variable cost, total fixed cost, total incremental cost and the financial advantage or disadvantage of accepting the order. This analysis should help you decide which special order should be accepted ( put the scenarios side by side). Make sure to include Per Unit and Total Cost.

Answer 1

Incremental Analysis
	Special Order # 1				Special Order # 2				Special Order # 3
	Per Unit	Reject	Accept	Increase ( decrease) in Net Operating Income	Per Unit	Reject	Accept	Increase ( decrease) in Net Operating Income	Per Unit	Reject	Accept	Increase ( decrease) in Net Operating Income
Incremental Revenue	51.50	0	97,850	97,850	53.50	0	123,050	123,050	54.75	0	114,975	114,975
Incremental Costs
Direct Materials	26.30	0	49,970)	(49,970)	26.30	0	60,490	(60,490)	26.30	0	55,230	(55,230)
Direct Labor	4.10	0	7,790	(7,790)	4.10	0	9,430	(9,430)	4.10	0	8,610	(8,610)
Variable Manufacturing Overhead	2.00	0	3,800	(3,800)	2.00	0	4,600	(4,600)	2.00	0	4,200	(4,200)
Variable Selling and Administrative Expenses	1.05	0	1,995	(1,995)	2.00	0	4,600	(4,600)	1.25	0	2,625	(2,625)
Incremental Fixed Cost	-	0	0	0	-	0	1,500	(1,500)		0	4,100	(4,100)
Total Incremental Cost		0	63,555	(63,555)		0	80,620	(80,620)		0	74,765	(74,765)
Totals		0	34,295	34,295		0	42,430	42,430		0	40,210	40,210