A customer has requested that Inga Corporation fill a special order for 2,300 un
ID: 2567953 • Letter: A
Question
A customer has requested that Inga Corporation fill a special order for 2,300 units of product K81 for $28 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $21.80 $5.90 5.00 Direct materials Direct labor Variable manufacturing overhead 3.00 Fixed manufacturing overhead Unit product cost 7.90 $21.80 Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product K81 that would increase the variable costs by $1.50 per unit and that would require an investment of $13,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by:Explanation / Answer
Solution:
The problem is related to the decision making whether to accept Special Order or reject.
The Relevant Cost will play a very important role in this type of decision making.
Relevant costs are the future cost which will incur in the future and vary with each alternative course of action.
Relevant Costs are direct materials, direct labor and variable manufacturing overheads since these costs are the variable cost and vary with the output of production. If company will make the product in house this cost incur but if they buy from outside supplier this cost will not incur.
In this type of question, fixed costs are treated as Irrelevant. Since the fixed costs are the sunk cost which will not vary with the production unit. The fixed cost will remain same whether company make the product in house or buy product from outside. Hence Fixed Costs are ignored.
Relevant Variable Cost per unit = direct materials $5.90 + Direct labor $5.00 + Variable MF Overhead $3 + Increase in Variable Cost per unit by $1.50 = $15.40 per unit
Unit Selling Price for Special Order = $28
Evaluation of Profit / (loss) from Special Order
Sales Revenue from Special Order (2300 Units x $28)
$64,400
Less: Relevant Variable Cost related to special order
(2300 Units x $15.40)
$35,420
Contribution Margin from Special Order
$28,980
Less: Additional Investment required for special order
$13,000
Net Profit from Special Order
$15,980
The company’s overall net operating income would be increased by $15,980 by the order is accepted.
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Sales Revenue from Special Order (2300 Units x $28)
$64,400
Less: Relevant Variable Cost related to special order
(2300 Units x $15.40)
$35,420
Contribution Margin from Special Order
$28,980
Less: Additional Investment required for special order
$13,000
Net Profit from Special Order
$15,980
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.