Wisconsin Metal Co. products 12.5-guage barbed wire that is retailed through far

Question

Wisconsin Metal Co. products 12.5-guage barbed wire that is retailed through farm supply companies. Presently, the company has the capacity to produce 100,000 tons of wire per year. It is operating at 80 percent of annual capacity and, at this level of operations, the cost per ton of wire is as follows:

Direct material              $520
Direct labor                      40
Variable overhead             50
Fixed overhead               190
Total                             $800

The average sales price for the output produced by the firm is $900 per ton. The State of Texas has approached the film to supply 200 tons of wire for the state's prisons for $620 per ton. No production modifications would be necessary to fulfill the order from the State of Texas.

a. What costs are relevant to the decision to accept this pecial order?

b. What would be the dollar effect on pre-tax income if this order were accepted? Wisconsin Metal Co. products 12.5-guage barbed wire that is retailed through farm supply companies. Presently, the company has the capacity to produce 100,000 tons of wire per year. It is operating at 80 percent of annual capacity and, at this level of operations, the cost per ton of wire is as follows:

Direct material              $520
Direct labor                      40
Variable overhead             50
Fixed overhead               190
Total                             $800

The average sales price for the output produced by the firm is $900 per ton. The State of Texas has approached the film to supply 200 tons of wire for the state's prisons for $620 per ton. No production modifications would be necessary to fulfill the order from the State of Texas.

a. What costs are relevant to the decision to accept this pecial order?

b. What would be the dollar effect on pre-tax income if this order were accepted?

Explanation / Answer

Special order Order Analysis (in '000) (in '000) (in '000) Sales: Regular Sales(900 *100 ) 90,000.00 90,000.00 0.00 special order 124.00 124.00 Manufacturing Costs Variable Costs 61,000.00 61,122.00 (122.00) Fixed Costs 80,000.00 80,000.00 0.00 Gross Profit 2.00 Only the variable costs are relevant in this sort of decision making Implementing this decision would increase the Pre tax Income by $2.00

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