Question

Wolverine Valve and Fitting Company, located in southern Michigan, manufactures a variety of indus- trial valves and pipe fittings. Currently, the company is operating at about 70 percent capacity. Manage- ment has been approached by Glasgow Industries Ltd. of Scotland with an offer to buy 120,000 units of a pressure valve. Glasgow Industries manufactures a valve that is almost identical to Wolverine's pres- sure valve; however, a fire in Glasgow Industries' valve plant has shut down its manufacturing opera- tions. Glasgow needs the 120,000 valves over the next four months to meet commitments to its regular customers. Glasgow is prepared to pay $28.50 each for the valves. Wolverine's total product cost for the pressure valve is $30, calculated as follows: $ 7.50 9.00 Direct material. Direct labor Manufacturing overhead ... Total product cost 13.50 $30.00 Manufacturing overhead is applied to production at the rate of $27 per direct-labor hour. This over- head rate is made up of the following components. Variable manufacturing overhead Fixed manufacturing overhead (traceable. Fixed manufacturing overhead (allocated) Applied manufacturing overhead rate $ 9.00 12.00 6.00 $27.00 Additional costs incurred in connection with sales of the pressure valve include sales commissions of 5 percent and freight expense of $1.50 per unit. However, the company does not pay sales commis- sions on special orders that come directly to management. In determining selling prices, Wolverine adds a 40 percent markup to total product cost. This provides a $42.00 suggested selling price for the pressure valve. The Marketing Department, however, has set the current selling price at $40.50 in order to maintain market share. Production management believes that it can handle the Glasgow Industries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $18,000 per month in the form of supervision and clerical costs. If management accepts the order, 30,000 pressure valves will be manufactured and shipped to Glasgow Industries each

Answer 1

Compute Direct labor hours as follows: Manufacturing overhead cost for the pressure valve DLH to produce a pressure valve =: Manufacturing overheadrate per direct labor hour _$13.5 $27 = $0.50 direct labor hour Comute each month direct labor hours required: No. of pressure valves will be manufactured per month on the GI order DLH to produce a pressure valve 0.50 DLH 30,000 15,000 DLH b) Prepare an analysis showing the impact of accepting the Glasgow industries order as follows:

	Per Unit	Totals for 120,000 units
Incremental revenue	$28.50	$3,420,000
Incremental costs:
Variable costs:
Direct material	$7.50	$900,000
Direct labor	$9	$1,080,000
Variable overhead ($12-$6)	$6	$720,000
Total variable costs		$2,700,000
Fixed overhead:
Supervisory and clerical costs ($18,000 × 4 months)		$72,000
Total incremental costs		$2,772,000
Total incremental profit		$648,000