Question

Lenovo Corporation has received a request to fill a special order for 2,600 units of Product L340 for $31 a unit. To fill the special order, the product would be changed slightly to meet customer specifications. The normal unit product cost of Product L340 is $20.70: Direct materials $ 6.20 Direct labor 3.00 Variable manufacturing overhead 3.30 Fixed manufacturing overhead 8.20 Unit product cost $ 20.70 Assume that direct labor is a variable cost. This special order will have no impact on Lenovo's total fixed manufacturing overhead costs. The customer would like slight changes to Product L340 that will increase the variable costs by $1.80 per unit and that would require an investment of $16,000 in a special tool that has no salvage value. This special order would have no effect on Lenovo's other sales. Lenovo has plenty of extra capacity to produce the special order. Lenovo's annual financial advantage (disadvantage) as a result of accepting this special order is:

Answer 1

Incremental analysis

Incremental revenue (2600*31)		80600
Incremental cost
Direct material (2600*6.2)	16120
Direct labor (2600*3)	7800
Variable manufacturing overhead (2600*3.3)	8580
Additional variable cost (2600*1.8)	4680
Special tool	16000
Total incremental cost		53180
Incremental profit (loss)		27420

Lenovo's annual financial advantage (disadvantage) as a result of accepting this special order is: $27420