Question

Snider, Inc., which has excess capacity, received a special order for 3,000 units at a price of $14 per unit which it could produce with the excess capacity. Currently, production and sales are anticipated to be 10,000 units without considering the special order. Cost of goods sold includes $30,000 of fixed manufacturing cost. Below is budget information for the current year sales of 10,000 units follows. Sales $200,000 Less: cost of goods sold 150,000 Gross Margin $50,000

If the special order is accepted, calculate the specific change in income for only the special order.  Make sure you show your work
Provide a recommendation to management if the company should  accept or reject this special order.  Explain in detail your recommendation to management.
Recommendation with calculations and impact to income of special order:

Answer 1

Out of 150000$ of COGS , 30000 is. Fixed cost and hence will not be considered

Variable cost = $150000 - $30000 = $120000

Per unit variable cost = $120000/10000 = $12 per unit

New offer per unit rate = $14

Profit from new offer (change in income )

= 3000 units * ($14-12) = $6000

Since there is additional profit from this offer which existing capacity, hence company should accept the offer.