Question:
A company manufactures a product, which has the following unit costs and wants to determine if they should accept a special order offer based on the information provided.
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Direct Materials
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$15.00
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Direct Labor
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$10.00
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Variable Overhead
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$4.00
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General Fixed Overhead Allocated (total fixed costs will remain the same with relevant range).
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$7.00
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Production capacity is 90,000 units per year
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Expects to produce only 75,000 units next year.
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The product normally sells for $25 each. A customer has offered to buy 14,000 units for $22 each.
a. What is the relevant (incremental) cost to make a unit for the special order?
b. What is the effect on income if the special order is accepted?
c. Should the company accept the special order?