11 A customer has requested that Lewelling Corporation fill

11.

A customer has requested that Lewelling Corporation fill a special order for 2,200 units of product S47 for $38 a unit. While the product would be modified slightly for the special order, product S47\'s normal unit product cost is $16.90:

Assume that 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 S47 that would increase the variable costs by $1.90 per unit and that would require an investment of $16,000.00 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. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Garrison 16e Rechecks 2017-12-15

Multiple Choice

$16,200

$40,760

($2,000)

($15,700)

Solution

The correct anser is 40760$ and the company should accept the special order.

Reason:

Revenue from Special order(2200 * 38$) 83600

Less:

Normal Variable Costs[(4.60 +4 +1.70) * 2200] 22660

Incremental VC (2200 * 1.90 ) 4180

Total Variable costs 26840

Avoidable Fixed Costs 16000

Total Costs 42840 (42840)

Incremental Benefit due to accepting the order 40760