Question

Humes Corporation makes a range of products. The company's predetermined overhead rate is $20 per direct labor-hour, which was calculated using the following budgeted data:
Variable manufacturing overhead $51,000
Fixed manufacturing overhead $289,000
Direct labor-hours 17,000
Management is considering a special order for 740 units of product J45K at $68 each. The normal selling price of product J45K is $79 and the unit product cost is determined as follows:
Direct materials $41.00
Direct labor 14.00
Manufacturing overhead applied 20.00
Unit product cost $75.00
If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order.
Required:
If the special order were accepted, what would be the impact on the company's overall profit?
Increase profit/ Decrease profit $_____.

Answer 1

Answer:

$7,400

Explanation:

The impact on the company's overall profit is shown below:-

Particulars                Amount

Sales                          $50,320  (740 × $68)

Less : Variable cost

Direct material          $30,340  (740 × $41)

Direct Labor               $10,360  (740 × $14)

Variable Manufacturing

overhead

($51,000 ÷ 17,000)        $2,220 (740 × $3)

= 3

company's overall profit $7,400

To reach the company's overall profit we simply deduct the Direct material, direct labor and variable manufacturing overhead from sales.