Wisconsin Metal Co. produces 12.5 gauge band barbed wire that is retailed throug

Question

Wisconsin Metal Co. produces 12.5 gauge band barbed wire that is retailed through farm supply companies. Presently, the company has the capacity to produce 100,000 ton of wire per year. It is operatin at 80 percent of annual capacity and, at this level of operations, the cost per ton of is as follows:
Direct Material $520
Direct Labor $40
Variable Overhead $50
Fixed Overhead $190
Total $800
The average sales for the output produced by the firm is $900 per ton. The state of Texas has approached the firm to supply 200 tons if wire for the state prisons for $620 per ton. No production modifications would be necessary to fulfill the order from the state of Texas.
What costs are relevant to the decision to accept this special order?
What would be the dollar effect on pre-tax income if this order is accepted?

Explanation / Answer

The costs that are relevant are the variable costs – direct material, direct labor, and variable overhead. Fixed overhead is not relevant, since it will not change in total. The dollars effect would be: Revenue 124,000 (620*200) Less costs: Direct materials 104,000 (520*200) Direct labor 8,000 (40*200) Variable overhead 10,000 (50*200) Pre-tax net income 2,000 So this special order would increase net income by 2,000.

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