Question

Gallerani Corporation has received a request for a special order of 4,300 units of product A90 for $26.90 each. Product A90's unit product cost is $26.40, determined as follows: Direct materials$2.55 Direct labor 7.85 Variable manufacturing overhead 6.95 Fixed manufacturing overhead 9.05 Unit product cost$26.40 Assume that direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product A90 that would increase the variable costs by $3.30 per unit and that would require an investment of $22,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Answer 1

Answer:

Effect on income= $4,875 increase

Explanation:

Giving the following formula:

Production costs:

Direct materials$2.55

Direct labor 7.85

Variable manufacturing overhead 6.95

Total= $17.35

Special offer:

Selling price= $26.9

Number of units= 4,300

Increase in variable cost= $3.3

Increase in fixed costs= $22,000

Because it is a special offer and there is unused capacity, we will take into account only the incremental fixed costs.

To calculate the effect on income, we need to use the following formula:

Effect on income= incremental contribution margin - incremental fixed costs

Effect on income=  4,300*(26.9 - 17.35 - 3.3) - 22,000

Effect on income= $4,875 increase