Question

The Houston Metals Corporation has received a request from a customer, Lufkin Trailers, to fill a special order for 2,400 units of product KHOW630. The customer, Lufkin Trailers, has offered to pay $36 per unit for KHOW630. Houston Metals would have to slightly modify the product for the special order. Product KHOW630's normal unit product cost is $17.50: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost $ 4.80 4.00 1.90 6.80 $17.50 50 You know that direct labor is a variable cost. You also know that the special order would have no effect on the company's total fixed manufacturing overhead costs. Lufkin Trailers, the customer, would like modifications made to product KHOW630 that would increase the variable costs by $170 per unit and that would require an investment of $18,000.00 in special molds that would have no salvage value. You have found out that this special order would have no effect on Houston Metals' 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: Melele Choice < Prev 15 of 18 !!! Next >

Answer 1

calculation of financial advantage or disadvantage as accepting the special order

cost per unit for the special order = $17.5+$1.7= $19.2

further, investment in special mold =18000

total cost to produce the special order = (19.2*2400)+18000 = $64080

total revenue from the contract = $36 * 2400 = $86400

benefit or advantages from the special order will be = $86400- $64080 = $22320