Question

Bramble Company is a leading manufacturer of sunglasses. One of Bramble’s products protects the eyes from ultraviolet rays. An upscale sporting goods store has contacted Bramble about purchasing 16,500 pairs of these sunglasses. Bramble’s unit manufacturing cost, based on a full capacity of 109,000 units, is as follows: Direct materials $6 Direct labor 5 Manufacturing overhead (60% fixed) 20 Total manufacturing costs $31 Bramble also incurs selling and administrative expenses of $75,770 plus $2 per pair for sales commissions. The company has plenty of excess manufacturing capacity to use in manufacturing the sunglasses. Bramble’s normal price for these sunglasses is $40 per pair. The sporting goods store has offered to pay $36 per pair. Since the special order was initiated by the sporting goods store, no sales commission will be paid. What would be the effect on Bramble’s income if the special order were accepted?

Answer 1

Answer:

the special order should increase Bramble's net income by $280,500

Explanation:

since this is a special order we only have to consider relevant costs and revenues to determine if the order should be accepted or not:

relevant revenue = 16,500 units x $36 per unit = $594,000

relevant costs:

direct materials = $6 per unit x 16,500 units = $99,000

direct labor = $5 per unit x 16,500 units =  $82,500

variable overhead = $20 per unit x 40% s 15,600 units = $132,000

total relevant costs = $313,500

the special order should increase Bramble's net income by = $594,000 - $313,500 = $280,500

we do not need to consider fixed costs because there is idle spare capacity to produce these units.