Question

Perez Concrete Company pours concrete slabs for single-family dwellings. Lancing Construction Company, which operates outside Perez’s normal sales territory, asks Perez to pour 46 slabs for Lancing’s new development of homes. Perez has the capacity to build 370 slabs and is presently working on 170 of them. Lancing is willing to pay only $2,520 per slab. Perez estimates the cost of a typical job to include unit-level materials, $810; unit-level labor, $500; and an allocated portion of facility-level overhead, $1,280. Required Calculate the contribution to profit from the special order. Should Perez accept or reject the special order to pour 46 slabs for $2,520 each?

Answer 1

Answer:

Since relevant revenue (115,92) is greater than relevant cost (60,260) the order should be accepted. By accepting the order the company will earn extra $60,375.92

Explanation:

Calculation of contribution to profit from special order:

Sales revenue =$2,520*46 slabs = 115,92

Cost of raw materials =$810*46 slabs = (37,260)

Cost of direct labor =$500*46 slabs =(23,000)

Total relevant cost = (37,260) + (23,000)

                                = (60,260)

contribution to profit = 115,92 - (60,260) = 60,375.92

Since relevant revenue (115,92) is greater than relevant cost (60,260) the order should be accepted. By accepting the order the company will earn extra $60,375.92