Question

Wehrs Corporation has received a request for a special order of 9,700 units of product K19 for $47.20 each. The normal selling price of this product is $52.30 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product K19 is computed as follows: Direct materials $ 18.00 Direct labor 7.30 Variable manufacturing overhead 4.50 Fixed manufacturing overhead 7.40 Unit product cost $ 37.20 Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product K19 that would increase the variable costs by $6.90 per unit and that would require a one-time investment of $46,700 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

Answer 1

Answer:

See below.

Explanation:

We can compute the profitability of this special order by accounting for the incremental costs,

Sales (9700 * 47.20) = $457,840

Incremental Variable costs = (18 + 7.30 + 4.50 + 6.90) = $36.7/unit

The incremental variable costs include the $6.9 for modifications and does not include 7.4 which is a part of non incremental fixed costs.

Profits from this special order are as follows,

Sales                                                   457,840

Less:

Variable costs (36.7*9700)                355,990

Incremental Fixed costs                    46,700

Profits from this special order           55,150

Since the order has positive contribution and as it yields profits, it should be accepted.

Hope that helps.