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

Cost for 3,100 units

   Direct material ($ 400 x 3,100)

$        1,240,000

   Direct labor ($ 140 x 3,100)

$            434,000

   Indirect manufacturing ($ 110 x 3,100)

$            341,000

Total cost

$        2,015,000

Total additional revenue ($ 1,210 x 3,100)

$        3,751,000

Less: Total cost

$        2,015,000

Contribution to profit

$        1,736,000

Total product and facility level cost incurred is indifferent for accepting and rejecting the order. So it is not considered for decision making.

As there is a profit of $ 1,736,000, the special order should be accepted.

Cost for 3,100 units
Direct material ($ 400 x 3,100)	$        1,240,000
Direct labor ($ 140 x 3,100)	$            434,000
Indirect manufacturing ($ 110 x 3,100)	$            341,000
Total cost	$        2,015,000
Total additional revenue ($ 1,210 x 3,100)	$        3,751,000
Less: Total cost	$        2,015,000
Contribution to profit	$        1,736,000