Allen Manufacturing Corporation produces a single product, the Utility Knife.
Budgeted amounts for the coming year are as follows:
Revenues (20,000 units at $12 each) $240,000
Direct material 40,000
Direct labor 70,000
Variable manufacturing overhead 50,000
Fixed manufacturing overhead 30,000
Net income $ 50,000
Prescott Company has offered to purchase 1,500 units of a special edition of the utility knife from Allen at a price of $11.50 per unit. This special edition will have additional variable costs of $0.25 per unit. Allen has the capacity to produce this order and it will not affect any of their other operations.
What is the incremental cost of accepting the special order?
What is the incremental profit (loss) associated with the special order?
Incremental cost of accepting the order:
DM $2.00 ($40k/20k)
DL $3.50 ($70k/20k)
VOH $2.50 ($50k/20k) + $0.25 extra = $2.75
total variable costs for new units: $2.00 + ...
Discussion guides the student through the computations and the reasons for them.