The Warner Company has the capacity to produce 50,000 units per year. The compan
ID: 2436096 • Letter: T
Question
The Warner Company has the capacity to produce 50,000 units per year. The company sells each unit for $122. Budgeted information is as follows:Revenues $5,612,000
Direct materials 1,932,000
Direct labor 552,000
Manufacturing overhead (fixed) 276,000
Manufacturing overhead (variable) 552,000
Total $2,300,000
A special order has been received for 4,000 units to be sold for $78 per unit. The Silva Company would incur an additional $50,000 in total fixed costs in order to lease a special machine in order to make a slight modification to the original product. Should the company accept the special order?
Answer
No, because there is not enough available capacity to fill this order.
Yes, accepting the order would increase profits by $48,000.
Yes, accepting the order would increase profits by $24,000
No, accepting this order would decrease profits by $2,000.
Explanation / Answer
Units budgeted to be sold = $5,612,000 / $122 = 46,000
Capacity utilization = 46,000 / 50,000 = 92%
Capacity utilization for special order = 4,000 / 50,000 = 8%
Total capacity utilization 100%
Variable cost per unit
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Direct Materials $1,932,000
Direct labor $552,000
Manufacturing Overhead $552,000
Total Variable cost $3,036,000
Variable cost per unit = $3,036,000 / 46,000 = $66 per unit
Sales from special order 4,000 x $78 = $312,000
Less : variable cost 4,000 x $66 = $264,000
Segment Contribution margin $48,000
Less : Additional Fixed cost $50,000
Segment profit / (Loss) -$2,000
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No, accepting this order would decrease profits by $2,000
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