Antiquities, Ltd., produces antique-looking books. Management has just received

Question

Antiquities, Ltd., produces antique-looking books. Management has just received a request for a special order for 2,000 books and must decide whether to accept it. Venus Company, the purchaser, is offering to pay $22.00 per book, plus $3.00 per book for shipping costs. The variable production costs per book include $9.20 for direct materials, $4.00 for direct labor, and $3.80 for variable overhead. The current year’s production is 22,000 books, and maximum capacity is 25,000 books. Fixed costs, including overhead, advertising, and selling and administrative costs, total $80,000. The usual selling price is $25.00 per book. Shipping costs, which are additional, average $3.00 per book. Determine wheter Antiquities should accept the special order.

Explanation / Answer

special order for 2000 books :

revenue(2000 * $[$22+$3] ) $50000

less: direct material ($9.20 * 2000) $18400

less: direct labour($4 * 2000) $8000

less: variable overhead($3.80 * 2000) $7600

net profit $16000

Current year production for (22000 books + 2000 books)

revenue(22000 *$25)+ (2000*$25) $600000

less: direct material ($9.20 * 24000) $220800

less: direct labour($4 * 24000) $96000

less: variable overhead($3.80 * 24000)    $91200

less: fixed cost $80000

Net profit $112000

Antiquities should not accept the special order because there is increase in net profit of $96000 , if the company continues its production.

Note:- In relevant costing , fixed cost is not considered in special order because it is unavoidable , it has to be incurred.

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