Question

Corporation produces shiny discs. A special order has been placed by the customer for 2,200 units of the shiny disc for $27 a unit. While the disc would be modified slightly for the special order, the normal unit product cost for each disc is $20.50:
Direct materials $ 5.80
Direct labor 4.00
Variable manufacturing overhead 2.90
Fixed manufacturing overhead 7.80
Unit product cost $ 20.50
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 each disc that would increase the variable costs by $1.90 per unit and that would require an investment of $16,000 in special equipment that would have no salvage value.This special order would have no effect on Rick Corp.'s other sales. The company has enough spare capacity for producing the special order.What would be the annual financial advantage (disadvantage) for Rick as a result of accepting this special order?a. $40,760b. ($15,700)c. ($2,000)d. $16,200

Answer 1

Answer:

Effect on income= $11,280 increase

Explanation:

Giving the following information:

A special order has been placed by the customer for 2,200 units of the shiny disc for $27 a unit.

Because it is a special order, we will take into account only the differential fixed costs.

First, we need to calculate the total unitary cost and differential fixed costs:

Total unitary variable cost= 5.80 + 4 + 2.9 + 1.9

Total unitary variable cost= $14.6

Total fixed cost= $16,000

Now, we can determine the effect on income:

Effect on income= 2,200*(27 - 14.6) - 16,000

Effect on income= $11,280 increase