Question

Stuart Concrete Company pours concrete slabs for single-family dwellings. Lancing Construction Company, which operates outside Stuart’s normal sales territory, asks Stuart to pour 47 slabs for Lancing’s new development of homes. Stuart has the capacity to build 500 slabs and is presently working on 200 of them. Lancing is willing to pay only $2,510 per slab. Stuart estimates the cost of a typical job to include unit-level materials, $880; unit-level labor, $510; and an allocated portion of facility-level overhead, $1,200. Required Calculate the contribution to profit from the special order. Should Stuart accept or reject the special order to pour 47 slabs for $2,510 each?

Answer 1

Answer:

a) Contribution from the special order= $52,640.  

b) Stuart should accept the order

Explanation:

The amount of contribution to profit from the special order is the difference between the revenue  and the relevant cost of variable cost of the special order.

The relevant cost of the special order is equal the sum of all variable cost only.

Note that the allocated facility overhead is irrelevant to whether to accept or reject the order. This is so because the costs would still be incurred either way.

Relevant variable costs of special order = (880 + 510) × 47 = $65,330

Sales revenue = 2,510 × 47 =  $117,970.00

Contribution from the special order =$117,970.00 -  $65,330

                                                            = $52,640.00

B) Stuart should accept the special order because it would increase its profit by $52,640.