Exercise 67A Special order decision LO 62 Gibson Company man

Exercise 6-7A Special order decision LO 6-2 Gibson Company manufactures a personal computer designed for use in schools and markets it under its own label. Gibson has the capacity to produce 33,000 units a year but is currently producing and selling only 11,000 units a year. The computer\'s normal selling price is $1,670 per unit with no volume discounts. The unit-level costs of the computer\'s production are $400 for direct materials, $140 for direct labor, and $110 for indirect unit-level manufacturing costs. The total product- and facility-level costs incurred by Gibson during the year are expected to be $2,110,000 and $803,000, respectively. Assume that Gibson receives a special order to produce and sell 3,100 computers at $1,210 each. Required Calculate the contribution to profit from the special order. Should Gibson accept or reject the special order? Contribution to profit Should Gibson accept or reject the special order?

Solution

a Incremental revenue 3751000 =3100*1210 Incremental costs: Direct materials 1240000 Direct labor 434000 Overhead 341000 2015000 Contribution to profit 1736000 Yes, accept the special order