5 The following is cost information for: ABC Company Product 20 Widget Points Al

Question

5 The following is cost information for: ABC Company Product 20 Widget Points All amounts are per unit Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead Total Manufacturing Cost 5.00 3.00 5.00 10.00 23.00 Variable Selling Cost (commission) 2.00 35.00 The normal selling price is ABC Has a request to produce a special order for XYZ company The selling price would be No Commission would be paid on the sale 20.00 Should the company accept the order? Provide the quantitative rationale A B What qualitative consideratiions need to be addressed?

Explanation / Answer

A. Cost of materials+direct labor+variable manufacturing overhead = 5+3+5

= $13 per unit

Variable selling cost (in the form of commission) would be nil.

Fixed manufacturing overhead will not be a relevant cost here in case of the special order.

Thus contribution margin per unit for the special order = selling price per unit – sum of all relevant costs

= 20-13

= $7 per unit.

As ABC company is earning a positive contribution margin from the special order it should accept the order.

B. In terms of qualitative considerations ABC should look at the following considerations – (1) does it have excess capacity to fulfill this special order? (2) Will this order, in any way, affect planned sales?

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