Question

A customer has requested that Lewelling Corporation fill a special order for 2,400 units of product S47 for $36 a unit. While the product would be modified slightly for the special order, product S47's normal unit product cost is $17.50:
Direct materials $4.80
Direct labor 4.00
Variable manufacturing overhead 1.90
Fixed manufacturing overhead 6.80
Unit product cost $17.50

Assume that 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 modifications made to product S47 that would increase the variable costs by $1.70 per unit and that would require an investment of $18,000.00 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. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:_________

Answer 1

Answer:

Effect on income= $38,640 increase

Explanation:

Giving the following information:

Units= 2,400

Seling price= $36

Variable cost per unit:

Direct materials $4.80

Direct labor 4.00

Variable manufacturing overhead 1.90

Total variable cost= 10.7

Increase in variable cost= $1.70

Increase in fixed costs= $18,000

Because it is a special offer, there is unused capacity, and other sales will not be affected, we will take into account only the incremental fixed costs (besides the variable costs).

Sales= (2,400*36)= 86,400

Total variable cost= 2,400*(10.7 + 1.7)= (29,760)

Increase fixed costs= (18,000)

Effect on income= $38,640 increase