Peirzynski Manufacturing Corporation produces a single product, the Utility Knif

Question

Peirzynski Manufacturing Corporation produces a single product, the Utility Knife. Budgeted amounts for the coming year are as follows: Revenues (20,000 units at $12 each) S240,000 40,000 70,000 Direct material Direct labor Variable manufacturing overhead 50,000 Fixed manufacturing overhead 30,000 50,000 Net income Podsednik Company has offered to purchase 1,500 units of a special edition of the utility knife from Peirzynski at a price of $11.50 per unit. This special edition will have additional variable costs of $0.25 per unit. Peirzynski has the capacity to produce this order and it will not affect any of their other operations What is the incremental profit (loss) associated with the special order?

Explanation / Answer

Calculation of Incremental Profit/Loss from the Special order:

Revenue = 1500*11.5 = 17250

Less: Variable Cost 1500*8.25 = 12375

Incremental Profit from Order = 4,875

Working notes:

Direct material cost for 20,000 units = 40,000

Direct material cost per unit = 40000/20000 = 2

Direct Labor cost for 20000 units = 70,000

Direct Labour Cost per unit = 70000/20000 = 3.5

Variable Manufacturing Overhead per Unit = 50000/20000 = 2.5

Hence VC per unit = 2+3.5+2.5 = 8

Additional VC per Unit for special order = 0.25

Total VC per Unit for Special Order = 8.25

Note: Fixed Overheads will not change dur to acceptance of offer because of spare capacity.

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