Question

Travers Company is contemplating the acceptance of a special order has the following unit cost behavior, based on 10,000 units (the total capacity of their factory). Travers Company is presently manufacturing 7000 units in their factory.
Direct Materials $5
Direct Labor $10
Variable Overhead $7
Fixed Overhead $6

Poppins Company wants to purchase 2,000 units at a special unit price of $36. The normal price per unit is $40. In addition, a special stamping machine will have to be purchased for $6250 in order to stamp the company’s logo on the product. What is the amount of the incremental income (loss) from accepting the order? (your answer should be the total incremental profit or loss for ALL 2000 units, not just one unit)

If your answer is a loss, put a minus sign in front of your answer. Input your answer without dollar signs or commas. DON'T ROUND ANY NUMBER EXCEPT YOUR FINAL ANSWER

Answer 1

Answer:

Details                                               2,000 units (increase)

Sales(2,000*$36)                                                   $72,000

Direct material                                 $10,000  

Direct Labor                                     $20,000

Variable overhead                          $14,000

Stamping Machine                         $6,250

Total Cost                                                               $50,250

Incremental Profit                                                  $21,750

Explanation:

Fixed cost may vary per unit but in total cost it does not change,and fixed costs are irrelevant because they will be incurred at the same level even if the order is not accepted and if it is accepted in total fixed cost level it will not change it will just change per unit meaning no increase or decrease in fixed costs.

If company is operating less than its capacity and labor is paid for normal capacity then labor cost may not change unless it it paid for per unit or is operating at full capacity. In this case it is paid per unit.