Time remaining: 1:07:55 5. customer has requested thet Inga Corporation fill a s
ID: 2587821 • Letter: T
Question
Time remaining: 1:07:55 5. customer has requested thet Inga Corporation fill a special order for 2,100 units of product K81 for $26 o unit. While the product would be modified slightly for the special order, product KB1's normal unit product cost is $21.00 Direct materials Direct labor Variable manufacturing overhead Flxed manufacturing overhead Unlt product cost $5.80 4.30 3.00 7.90 $21.00 Direct lobor is a variable cost. The special order would have no effect on the company's total fixed ma customer would like modifications made to product K81 that would increase varlable require an investment of $10,100 in special molds that would have no salvage value require an investment of st0,00 in special molds that wothe varieble menufacturing costs by s1.30 per unit and that would the special order sS acopke tbhe tcocton the company's othersales The company has ample spare capacity for producing the special ordor. If the special order is accepted, the company's overall ne g income would increase (decrease) by O $10.500 O $(2.330) O $14.260 O si10)Explanation / Answer
Fixed costs already incurred are sunk costs which have no impact on decision making and are thus not relevant. So, Fixed manufacturing overhead of $7.90 per unit is not relevant in this decision
Fixed costs which are required to be incurred for a decision are relevant costs as they are required to be done if the decision is taken. So, $10,100 is relevant cost
Variable cost per unit for special order
= Direct material + Direct labor + Variable overhead + Increase in variable overhead
= $5.80 + $4.30 + $3 + $1.30
= $14.40
Contribution margin (Total) from the special order
= (Selling price – Variable costs) x Total units
= ($26 - $14.40) x 2,100
= $24,360
Net Income from special order
= Contribution – Fixed costs
= $24,360 - $10,100
= $14,260
So, option C is the correct option
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