Lancaster Lighting Corp. produces a model of outdoor floodlight that normally se

Question

Lancaster Lighting Corp. produces a model of outdoor floodlight that normally sells for $15 per light. Sales per year are 500,000 units, and the production line is operating at 70% capacity. Lancaster has been presented with a special one-time export order for 40,000 lights at $11 per light. The $11 price is below the current total cost of production. Listed below are the costs based on the production of 500,000 units. There would be no increase in fixed costs by accepting this order, but there would be a one-time crating expense of $5,000. The special order would have no effect on the existing business because it is being exported to a market that Lancaster does not normally serve. Prepare an incremental analysis and determine the effect of accepting the special order. Should Lancaster accept this order? Costs at 500,000 units of production: Direct labor                   2,500,000 Direct materials                   1,750,000 Variable manufacturing overhead                       625,000 Fixed manufacturing overhead                   1,250,000 Total manufacturing cost                   6,125,000 ANALYSIS: Lancaster Lighting Corp. produces a model of outdoor floodlight that normally sells for $15 per light. Sales per year are 500,000 units, and the production line is operating at 70% capacity. Lancaster has been presented with a special one-time export order for 40,000 lights at $11 per light. The $11 price is below the current total cost of production. Listed below are the costs based on the production of 500,000 units. There would be no increase in fixed costs by accepting this order, but there would be a one-time crating expense of $5,000. The special order would have no effect on the existing business because it is being exported to a market that Lancaster does not normally serve. Prepare an incremental analysis and determine the effect of accepting the special order. Should Lancaster accept this order? Costs at 500,000 units of production: Direct labor                   2,500,000 Direct materials                   1,750,000 Variable manufacturing overhead                       625,000 Fixed manufacturing overhead                   1,250,000 Total manufacturing cost                   6,125,000 ANALYSIS:

Explanation / Answer

INCREMENTAL ANALYSIS:

` incremental production qty 500000 540000 cost direct labour 2500000 2700000 200000 direct materials 1750000 1890000 140000 variable mfg OH 625000 675000 50000 fixed mfg OH 1250000 1250000 0 total mfg cost 6125000 6515000 390000 crating expense 5000 395000 sales revenue 7500000 7940000 440000 increase in profit 45000 Decision: as the incremental revenue is more than the incremental cost by $45000, the export order should be accepted.

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