Question

Katzev Company manufactures a personal computer designed for use in schools and markets it under its own label. Katzev has the capacity to produce 40,000 units a year but is currently producing and selling only 32,000 units a year. The computer’s normal selling price is $750 per unit with no volume discounts. The unit-level costs of the computer’s production are $250 for direct materials, $225 for direct labor, and $62.50 for indirect unit-level manufacturing costs. The total product- and facility-level costs incurred by Katzev during the year are expected to be $2,000,000 and $500,000, respectively. Assume that Katzev receives a special order to produce and sell 6,000 computers at $562.50 each.
Should katzev accept or reject the special order?

Answer 1

Answer:

Accept the special order.

Explanation:

To accept a special order, the price of the special order should be lower than the making price.

If Katzev accepts the special order,

the revenue ($562.50 x 6,000 computers) = $3,375,000

Less: Avoidable costs (Unit-level costs)

Materials ($250 x 6,000)        1,500,000

Direct labor ($225 x 6,000)    1,350,000

Manufacturing costs                 375,000

($62.5 x 6,000)

Total Avoidable costs                                      $3,225,000

Profit if accepts the special order                 $   150,000

As the company will receive profit, the company should accept the order.

Note: Fixed costs cannot be avoided irrespective of accepting order or making products. Therefore, total product- and facility-level costs are not deducted.