Fanning Company manufactures a personal computer designed for use in schools and
ID: 2511922 • Letter: F
Question
Fanning Company manufactures a personal computer designed for use in schools and markets it under its own label. Fanning has the capacity to produce 28,000 units a year but is currently producing and selling only 15,000 units a year. The computer’s normal selling price is $1,790 per unit with no volume discounts. The unit-level costs of the computer’s production are $530 for direct materials, $110 for direct labor, and $170 for indirect unit-level manufacturing costs. The total product- and facility-level costs incurred by Fanning during the year are expected to be $2,210,000 and $818,000, respectively. Assume that Fanning receives a special order to produce and sell 3,160 computers at $1,290 each.
Calculate the contribution to profit from the special order. Should Fanning accept or reject the special order?
Explanation / Answer
Since the product level costs are not directly related to the units to be produced, we will not consider the same in calculation of the contribution margin.
The profitability of the order is calculated as under.
The company should accpet the offer.
Sales -units 3160 Per unit Total Sales 1290 4076400 Unit level costs: Direct material 530 1674800 Direct labor 110 347600 Indirect manufacturing cost 170 537200 Total direct costs 2559600 Contribution margin 1516800Related Questions
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