12. Montoya Enterprises prpduces a sword that sells for $200. Although the compa

Question

12. Montoya Enterprises prpduces a sword that sells for $200. Although the company's production capacity is 3,000 swords per year, only 2,500 swords are currently being produced and sold Humperdinck Corporation has offered to purchase 500 swords as a one-time special purchase at a price of $160 per sword. If the special order is accepted, Montoya Enterprises will have to incur additional fixed costs of $1,000. At Montoya's current level of production (2,500 swords), the Montoya Enterprises incurs the following costs: Direct materials Direct labor Variable factory overhead Fixed factory overhead What will be the impact on Montoya's Enterprises' income if the $200,000 $100,000 50,000 $ 85,000 special order is accepted?

Explanation / Answer

Without Order With order Difference in favour of Accepting Order. Sales = ($200 x 2500);($200 x 2500)+($160 x 500) $500,000.00 $580,000.00 $80,000.00 Less : Variable Cost Direct materials $80 x 2500; $80 x 3000 $200,000.00 $240,000.00 $40,000.00 Direct labor $40 x 2500; $40 x 3000 $100,000.00 $120,000.00 $20,000.00 Variable factory overhead $20 x 2500 ; $20 x 3000 $50,000.00 $60,000.00 $10,000.00 Total Variable Costs $350,000.00 $420,000.00 $70,000.00 Contribution Margin $150,000.00 $160,000.00 $10,000.00 Less: Fixed Cost $85,000.00 $86,000.00 $1,000.00 Net Income $65,000.00 $74,000.00 $9,000.00 if the special order is accepted net income would increased by $9000.

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