Answer:
1. The incremental profit from accepting the special order is $150.
2. Yes, MSI should accept the special order. This is because it will increase profit by $150.
3. The incremental loss from accepting the special order is $350.
4. The special order price at which MSI would be indifferent between accepting or rejecting the special order is $12.50 per unit.
Explanation:
Note that only variable costs are relevant to making decision on a special order. That is, fixed cost is not relevant. Therefore, we have:
Total variable cost per unit = Direct materials + Direct labor + Variable manufacturing overhead = $1.50 + $0.60 + $2.25 = $4.35.
We then proceed as follows:
1. Compute the incremental profit (or loss) from accepting the special order.
Incremental profit (or loss) = ((Special order price per unit - Total variable cost per unit) * Units of special order) - Modification cost = (($5 - $4.35) * 1,000) - $500 = $150
Therefore, the incremental profit from accepting the special order is $150.
2. Should MSI accept the special order?
Yes, MSI should accept the special order. This is because it will increase profit by $150.
3. Suppose that the special order had been to purchase 1,000 copies of the program for $4.50 each. Compute the incremental profit (or loss) from accepting the special order under this scenario.
Incremental profit (or loss) = ((Special order price per unit - Total variable cost per unit) * Units of special order) - Modification cost = (($4.50 - $4.35) * 1,000) - $500 = ($350), or –$350
Therefore, the incremental loss from accepting the special order is $350.
4. Suppose that MSI is operating at full capacity. To accept the special order, it would have to reduce production of the history program. Compute the special order price at which MSI would be indifferent between accepting or rejecting the special order. (Round your answer to 2 decimal places.)
This can be calculated as follows:
Modification cost per unit = Modification cost / Units of special order = $500 / 1,000 = $0.50
Special order price = Regular price + Modification cost per unit = $12 + $0.50 = $12.50 per unit
Therefore, the special order price at which MSI would be indifferent between accepting or rejecting the special order is $12.50 per unit.
