The Minton Company has gathered the following information for a unit of its most

Question

The Minton Company has gathered the following information for a unit of its most popular product: $ 7 Direct materials Direct labor Overhead (50% variable) Cost to manufacture Desired markup (50%) Target selling price 6 16 8 $24 The above cost information is based on 5,900 units. A foreign distributor has offered to buy 2,900 units at a price of $19 per unit. This special order would not disturb regular sales. Variable shipping and other selling expenses would be an additional $1 per unit for the special order. If the special order is accepted, Minton's operating profits will increase by: $%7,250 $8,700 O $14,500 O $5,800

Explanation / Answer

Relevant costs are those costs which are incurred only if the special order is taken. Fixed costs are sunk costs and they do not change with a change in production and so they are not relevant for decision making. So, 50% overhead (Fixed portion of overhead) is not relevant and only variable portion of overhead is relevant

In the present case, if the special order is taken, relevant costs per unit are as follows

Direct materials + Direct labor + 50% of Overhead + Additional selling expenses

= $7 + $3 + $6 x 50% + $1

= $14 per unit

So, Contribution per unit

= Selling price per unit – Variable costs per unit

= $19 - $14

= $5 per unit

So, Profits will increase by

= Number of units x Contribution per unit

= 2,900 x $5

= $14,500

So, as per above calculations, option C is the correct option

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