Question

Answer 1

Solution:

Part 1 -

It is given in the question that the fixed manufacturing cost is $322,000 every year within production range of 40,000 to 46,000 rets. So the company will not incur any additional fixed manufacturing cost even if they make or do not make additional 6,000 Units over 40,000 units. Also fixed selling expenses are not relevant to decision making since this cost has already been incurred and not relevant.

Direct materials, direct labor and variable expenses are relevant since they will incur for the special order. Machine Cost is a special cost for special equipment to accomplish this special order hence this will also consider in calculation of increase or decrease in profit.

Calculation of financial advantage/(disadvantage) of accepting the special order
	Per Unit	6,000 Rets
Sale Price ($51 - 16% discount)	$42.84	$257,040
Incremental Cost:
Direct materials	$20.00	$120,000
Direct labor	$6.00	$36,000
Variable Manufacturing Overhead	$3.00	$18,000
Variable selling expense ($4 - 75% Slashed)	$1.00	$6,000
Plus: Machine Cost		$12,000
Total Cost		$192,000
Increase in Profits (Financial advantages)		$65,040

Part 2 –

The army will reimburse all the variable and fixed cost along with fixed fee.

Fixed Fee on 6,000 Rets @ $1.4 per Ret	$8,400
Reimbursement of Fixed Manufacturing Cost 6,000 Rets @ $7 per ret	$42,000
Total Increase in Profit	$50,400
Financial advantage of accepting US Army order	$50,400

Part 3 –

Calculation of Profit when units sold in Regular Channel

	Per Unit	6,000 Rets
Sale Price	$51.00	$306,000
Incremental Cost:
Direct materials	$20.00	$120,000
Direct labor	$6.00	$36,000
Variable Manufacturing Overhead	$3.00	$18,000
Variable selling expense	$4.00	$24,000
Total Relevant Cost		$198,000
Increase in Profits when sold in Regular Channel		$108,000
Increase in profits when sold to US Army (Refer Part 2)		$50,400
Financial disadvantage (Loss) due to foregoing sales through regular channel for selling to US Army ($108,000 - $50,400)		$57,600