Question

Gallerani Corporation has received a request for a special order of 4,200 units of product A90 for $26.80 each. Product A90's unit product cost is $26.20, determined as follows: $ Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost 2.50 7.80 6.90 9.00 $26.20 Assume that 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 A90 that would increase the variable costs by $3.20 per unit and that would require an investment of $21,000 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. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be: Multiple Choice

Answer 1

Amount Amount $ 112,560 1 Particulars 2 Incremental revenue 3 Incremental costs: 4 Direct materials 5 Direct labor 6 Variable manufacturing overhead 7 Increase in variable costs 8 Purchase of special tool 9 Total Incremental costs 10 Financial advantage (disadvantage) $ 10,500 $ 32,760 $ 28,980 $ 13,440 $ 21,000 $ 106,680 $ 5,880 12 Fixed cost is irrelevent, because it is a sunk cost. 14 Hence, the correct option is $5,880.

Amount Amount -4200*26.8 1 Particulars 2 Incremental revenue 3 Incremental costs: 4 Direct materials 5 Direct labor 6 Variable manufacturing overhead 7 Increase in variable costs 8 Purchase of special tool 9 Total Incremental costs 10 Financial advantage (disadvantage) =2.5*4200 -4200*7.8 =4200*6.9 =3.2*4200 21000 =SUM(B4:B8) =+C2-C9