Question 4 Not yet answered Points out of 3.00 P Flag question Rojo Corporation

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Question 4 Not yet answered Points out of 3.00 P Flag question Rojo Corporation has received a request for a special order of 8,000 units of product W68 for $27.20 each. Product W68's unit product cost is $18.50, determined as follows: Direct materials... $2.20 Direct labor. 7.90 Variable manufacturing overhead...... 1.50 Fixed manufacturing overhead... | 6,90 Unit product cost .. $18.50 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 W68 that would increase direct materials by $6.50 per unit and that would require an investment of $31,000 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. AA BI TA Q1: Should Rojo accept or reject this special order? Why? (Defend your answer by discussing the relevant revenues/costs and the incremental impact on Rojo's operating net income.)

Explanation / Answer

ans)

Cost of making the special order :

Direct materials = 2.2

Direct labour = 7.9

Variable manufacturing overhead = 1.5

Addtional material cost = 6.5

Total cost = 18.1

For 8000 units = 18.1 X 8000 = 144800

Investment in special moulds = 31000

total cost of special order = 175800

Revenue from special order = 8000 X $27.2 = 217600

Cost of special order = 175800

Revenue from special order = 41800

Therfore rojo should accept the special order.

Fixed costs are not relevent for decision making as they do not change if special order is accepted or not.

Additional material costs are added as they are variable and used especially for special order.

Cost of moulds are added to cost as they purchased for special order and they do not have any other use for other products

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