Emmett Enterprises received a special order for 300 units of its product at a sp

Question

Emmett Enterprises received a special order for 300 units of its product at a special price of $250 per unit. The buyer has also requested an upgrade in the quality of direct materials which will increase direct material costs by $10 per unit and required a new tool that has a one-time cost of $10,000. Sanchez Enterprises has the capacity to manufacture this product without impacting its normal production. The product mnormally sells for $300 per unit and has the following per unit manufacturing costs:

Direct Materials                                     $ 75

Direct Labor                                              50

Variable Manufacturing Overhead           35

Fixed Manufacturing Overhead                70

Should Sanchez Enterprises accept the special order? Support your answer by showing your calculations by determining how much Sanchez Enterprises’ income will change if they accept the special order?

Explanation / Answer

Sales revenues from special order = 300 units * 250 per unit = 75,000

Relavent costs = Direct materials + Direct labour + Variable manufacturing overhead + Cost of the new tool

= [(75+10)*300] + (50*300) + (35*300) + 10,000

= 25,500 + 15,000 + 10,500 + 10,000

= 61,000

Sanchez Enterprises should accept the special order.

Income from special order = Revenues - Relavent costs

= 75,000 - 61,000

= 14,000

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