Harrison Ford Company has been approached by a new customer with an offer to pur

Question

Harrison Ford Company has been approached by a new customer with an offer to purchase 10,000 units of its model IJ4 at a price of $5 each. The new customer is geographical separated from the company's other customers, and existing sales would not be affected. Harrison normally produces 75,000 units of 134 pec year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the normal level of activity is as follows: Fixed overhead will not be affected by whether or not the special order is accepted.

Explanation / Answer

Fixed cost is not affected , so it is not considered in decision making

so the total variable cost for the special order would be as follows

particulars                  amount $

direct material                 1.75

direct labour                     2.5

variable overhead( note)     1.607

Total cost / unit                5.857

Selling price                      5

loss per unit                      0.857

Total loss           = 0.857 * 10000

                        = $ 8570

If the special order is accepted the operational income will be reduced by $ 8570

Note : Variable overhead

At normal capavity variable overead per unit = 1.5

so total variable over head = 75000 * 1.5

                                       = $ 112500

so at 70000 activity ( 60000+10000) absorption rate = 112500/70000

                                                                           = $ 1.607 per unit

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