Wiacek Corporation has received a request for a special order of 5,400 units of

Question

Wiacek Corporation has received a request for a special order of 5,400 units of product F65 for $28.40 each. Product F65's unit product cost is $27.85, determined as follows:

8.25   

$27.85   

Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product F65 that would increase the variable costs by $4.70 per unit and that would require an investment of $14,000 in special molds that would have no salvage value.

This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by:

  Direct materials $3.30      Direct labor 8.60      Variable manufacturing overhead 7.70      Fixed manufacturing overhead

8.25   

  Unit product cost

$27.85   

Explanation / Answer

Fixed costs absorbed is not a relevant cost and is to be excluded in calculating relevant costs.

So, relevant cost per unit = $27.85 - $8.25 + $4.70 = $24.30

Contribution = Sales - Variable costs = $28.40 - $24.30 = $4.10 per unit.

Total Contribution - Additional Fixed Costs

= $4.10 x 5,400 - $14,000

= $8,140

So, there is additional profit of $8,140.So, the special order should be selected.

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