Question

The Melville Corporation produces a single product called a Pong. Melville has the capacity to produce 60,000 Pongs each year. If Melville produces at capacity, the per unit costs to produce and sell one Pong are as follows: Direct materials $ 15 Direct labor $ 12 Variable manufacturing overhead $ 8 Fixed manufacturing overhead $ 9 Variable selling expense $ 8 Fixed selling expense $ 3 The regular selling price for one Pong is $80. A special order has been received by Melville from Mowen Corporation to purchase 6,000 Pongs next year. If this special order is accepted, the variable selling expense will be reduced by 75%. However, Melville will have to purchase a specialized machine to engrave the Mowen name on each Pong in the special order. This machine will cost $9,000 and it will have no use after the special order is filled. The total fixed manufacturing overhead and selling expenses would be unaffected by this special order. Assume that direct labor is a variable cost. Assume Melville anticipates selling only 50,000 units of Pong to regular customers next year. If Mowen Corporation offers to buy the special order units at $65 per unit, the annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Answer 1

Answer:

Financial advantage $159,000

Explanation:

unit variable cost = 15 + 12 + 8 + (25%×8) = $37

Note the selling variable cost is now 25% of the initial cost before the special order because of the 75% savings

The fixed cost were not considered in the analysis because they are not relevant. They would be incurred either way, whether the order is accepted or not

Financial advantage of the special order

                                                                                                 $

Sales revenue from special order = (6,000× $65) =     390,000

Variable cost ( 6000×  $37 )                                  =       (222,000 )

Cost of special machine                                                 ( 9,000)

Financial advantage                                                         159,000