Question

Adams Furniture receives a special order for 10 sofas for a special price of $3,000. The direct m als and direct labor for each sofa are $100. In addition, supervision and other fixed overhead costs average $150 per sofa. Should Adams accept the special order? Why or why not? Would it make a difference to your answer if Adams is at full capacity and its current line of sofas sells for $500 each?

Answer 1

Answer:

                                                                        $

Special order of sofa                                   3,000

Less: Relevant cost of production:

Direct material & direct labour ($100 x 10) 1,000

Incremental benefits                                     2,000

Adams Furniture should accept the special order because the incremental benefit is $2,000

If Adams Furniture Operates at Full Capacity   $

Sales of sofa (10 x $500)                                    5,000

Les: Relevant cost of production

Direct material & direct labour ($100 x 10)       1,000

Incremental benefits                                            4,000

In this case, Adams Furniture should not accept the special order because the incremental benefit of the special order is less than the incremental benefit at full capacity. Adams Furniture can only accept the special order if the buyer is ready to pay $500 per order as against the $300 per sofa offered by the buyer.

                                 

Explanation: