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.

Required:
What is the amount of the incremental income (loss) from accepting the order?

Answer 1

Answer:

The amount of the incremental income  from accepting the order is  $21,750 .

Explanation:

Incremental analysis of Accepting Special Order

Hint : Consider Incremental Amounts Only

Sales (2,000 units × $36)                      $72,000

Less Expenses

Direct Materials ($5  × 2,000)               ($10,000)

Direct Labor ($10  × 2,000)                  ($20,000)

Variable Overhead ($7 × 2,000)          ($14,000)

Special stamping machine                     ($6250)

Incremental income/ (loss)                    $21,750

Note : There is excess capacity of 3,000 units (10,000 units - 7,000 units) to meet the Special Order. Hence

Fixed Overheads will be the same whether or not the special order is accepted, hence they are not included in the analysis.

Conclusion :

The amount of the incremental income  from accepting the order is  $21,750 .