Glade Company produces a single product. The costs of producing and selling a si

Question

Glade Company produces a single product. The costs of producing and selling a single unit of this product at the Company's current activity level of 8,000 units per month are: The normal selling price is $15 per unit. The company's capacity is 10,000 units per month. An order has been received from a potential customer overseas for 2,000 units at a price of $12,00 per unit. This order would not affect regular sales. If the order is accepted, by how much will monthly profits increase or decrease? (The order would not change the company's total fixed costs.). Assume the company has 500 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? Explain.

Explanation / Answer

Answer: 1

Since the company has excess capacity of 2000 units (10000 units - 8000 units), there would be no incremental fixed cost. Only variable cost will be considered for the special order of 2000 units.

Answer:2

The relevant cost is $1.50 (variable selling and administrative expenses). All other variable costs are sunk, since the units have already been produced. The fixed costs would not be relevant, since they will not be affected by the sale of leftover units.

Per Part Total for 2000 units Increase in revenue from special order (a) $     12.00 $                  24,000.00 Increase in cost related to special order: Direct material $       2.50 $                    5,000.00 Direct labor $       3.00 $                    6,000.00 Variable manufacturing overhead $       0.50 $                    1,000.00 Variable selling and administrative expenses $       1.50 $                    3,000.00 Incremental cost (b) $       7.50 $                  15,000.00 Increased contribution margin from special order (a) - (b) $       4.50 $                    9,000.00

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