3. The following information relates to a product produced by the Creamer Compan

Question

3. The following information relates to a product produced by the Creamer Company: Direct Materials Direct Labor VOH FOH Unit cost $24 15 30 $87 Fixed selling costs are $500,000 per year, and variable selling costs are $12 per unit sold. Although production capacity is 600,000 units per year, the company expects its customer demand to only be 400,000 units next year. The product normally sells for $120 each. A customer has offered to buy 60,000 units for $90 each. Variable selling costs cannot be avoided in this offer. What impact will this special order have on Creamer's profit if it accepts the offer?

Explanation / Answer

3) Calculate effect of special order :

Incremental profit will increase by $540000

Incremental revenue (60000*90) 5400000 Incremental cost Direct material (60000*24) (1440000) Direct labour (60000*15) (900000) Variable overhead (60000*30) (1800000) Variable Selling cost (60000*12) (720000) Total incremental cost (4860000) Incremental profit 540000

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