Question 1 Ayayai Company is a leading manufacturer of sunglasses. One of Ayayai

Question

Question 1 Ayayai Company is a leading manufacturer of sunglasses. One of Ayayai’s products protects the eyes from ultraviolet rays. An upscale sporting goods store has contacted Ayayai about purchasing 19,500 pairs of these sunglasses. Ayayai’s unit manufacturing cost, based on a full capacity of 110,000 units, is as follows: Direct materials $7 Direct labor 5 Manufacturing overhead (60% fixed) 20 Total manufacturing costs $32 Ayayai also incurs selling and administrative expenses of $77,460 plus $2 per pair for sales commissions. The company has plenty of excess manufacturing capacity to use in manufacturing the sunglasses. Ayayai’s normal price for these sunglasses is $42 per pair. The sporting goods store has offered to pay $35 per pair. Since the special order was initiated by the sporting goods store, no sales commission will be paid. What would be the effect on Ayayai’s income if the special order were accepted? Ayayai’s income will by $

Explanation / Answer

Ans)

Calculation of income received by special order

Sales value ( 19500 X 35) = 682500

Less: Variable costs

Direct materials (19500 X 7) = (136500)

Direct labour ( 19500 X 5) = (97500)

Manufacturing overhead (19500 X 8) = (156000)

(20 X 60% fixed = 12, 20 - 12 = 8 variable)

Sellinhg and administrative expense = ( 13730)

(77460 / 110,000 X 19500) -------------------

Net income 278770

----------------------

Better to accept the order as it increases its net income by 278770

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