Our company manufactures and sells calculators for $80 each. A major University

Question

Our company manufactures and sells calculators for $80 each. A major University has offered us $55 per calculator for a one-time order of 500 calculators. Our costs to manufacture a calculator include: direct materials, $25 per unit; direct labor, $20 per unit; variable factory overhead, $15 per unit; and fixed manufacturing overhead, $12 per unit. Assume that we have excess capacity and the special order will not affect regular sales. What is the change in operating income that would result from accepting this special sales order? I Select ] Should we accept the special order? I Select ]

Explanation / Answer

Fixed costs are sunk costs and are not considered in decision making as these costs have already been incurred by an organization and so they are not relevant for decision making

So, Relevant costs are only the variable costs

= Direct materials + Direct labor + Variable factory overhead

= $25 + $20 + $15

= $60 per unit

Since the university is offering $55 per unit, the special order will result in a loss of $5 per unit ($60- $55)

So, Total loss due to special order if the order is accepted

= ($60 - $55) x 500

= $2,500

Since the order will result in a loss of $2,500, it should not be accepted

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