question archive Acceptance of a special order
Acceptance of a special order
Subject:AccountingPrice:2.87 Bought7
Acceptance of a special order. Although the Missouri Company has the capacity to produce 6,000 units per month, current plans call for monthly production and sales of only 10,000 units at $15 each. Costs per unit are as follows: .
Direct Materials..... 5.00
Direct Labor..... 3.00
Variable Factory Overhead.. 0.75
Fixed Factory Overhead........... 1.50
Variable Marketing Expense..... 0.25
Fixed Marketing Expense..... 1.00
$11.50
Required:
1) Recommendation as to whether the company should accept a special order for 4,
(2) The maximum price the Missouri Company should be willing to pay an outside supplier
(3) The unit cost figure the company would use in costing inventory, using direct costing. @$10 who is interested in manufacturing this product. resulting in a 10% increase in sales volume.
(4) The effect on the monthly contribution margin if the sales price were reduced to $14,
(CGAA adapted)
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Answer:
Solution 1:
Income from special order = Revenue from special order - Variable cost
= (4000*$10) - 4000* ($5 + $3 + $0.75 + $0.25) = $4,000
Solution 2:
Maximum price Missouri company willing to pay an outside supplier in manufacturing this product = Variable product cost per unit = ($5 + $3 + $0.75) = $8.75 per unit
Note: It is assumed that fixed cost is unavoidable, even if we are buying from outside supplier.
Solution 3:
Unit cost figure the company would use in costing inventory = Unit product cost = $5 + $3 + $0.75 + $1.50 = $10.25 per unit
Solution 4:
Variable cost per unit = $9 per unit
Existing sales volume = 10000 units
Existing contribution margin = ($15 - $9) * 10000 = $60,000
New sales volume = 10000*110% = 11000 units
New contribution margin = ($14 - $9) * 11000 = $55,000
Effect on monthly contribution margin if sales price reduced to $14 = $55,000 - $60,000 = $5,000 decrease in contribution margin.
