Example#1-Special Offer The Lambert Corporation sells its main product, scooters

Question

Example#1-Special Offer The Lambert Corporation sells its main product, scooters at a price of $52 per unit. The cost per unit for the scooters is as follows: Assume the company has excess capacity. Excess capacity means that the company can increase production by only adding variable costs. Fixed costs do not increase until the company uses up all excess capacity. Direct materials Direct labor Factory overhead (2/3 fixed) Total cost 13 15 12 40 The company has received an order for 20,000 units for $36 each. The buyer will require special handling and shipping which will amount to $2 per unit. Should the company accept the offer?

Explanation / Answer

Incremental analysis :

Yes, Company should accept special order

Sales (20000*36) 720000 Cost Direct material (20000*13) 260000 Direct labour (20000*15) 300000 Factory overhead (20000*12/3) 80000 Special handling and shipping 40000 Incremental profit (loss) 40000

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