Question

Mcniff Corporation makes a range of products. The company's predetermined overhead rate is $15 per direct labor hour, which was calculated using the following budgeted data: Variable manufacturing overhead Fixed manufacturing overhead Direct labor-hour $ 69,000 $276,000 23,000 Management is considering a special order for 570 units of product 096S at $51 each. The normal selling price of product 096S is $62 and the unit product cost is determined as follows: Direct materiale Direct labor Manufacturing overhead applied Unit product cost $ 20.00 19.00 15.00 $50.00 If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order. Required: The financial advantage (disadvantage) for the company as a result of accepting this special order would be:

Answer 1

• Direct materials, Diveet Jaboy and variable manu focturing overhead are relevant in this decision, o fixed manufacturing overhead is not relevant since it would not be apuected by the decision. The variable portion of the manufacturing overhead rate is computed as follows:- - variable portion of the prede teymined overhead yate = variable manufacturing overhead Divecut laboy hours $ 69,000 - = $3 por direct labor-hr. 23,000 direct labor hours The direct laboy hours per unit for the special order can be determined as follows: - Direct labour-hours = Manufacturing overhead applied pre determined overhead rate = $15 = 1 direct labor-hours $15 consequently, the variable manufacturing overhead for the special order would be: variable manufacturing overhead = variable portion of the predetermined overhead rate x Direct labor-hours - $3 per direct labor hrs x 1 direct labor his = $3

$51 putting all together special order phice vanable costs Direct material Direct labor variable manufacturing overhead Total variable cost $46 contribution margin $5 [ $51 - $46] x units ordered 570 units = Total increase in profit from special order ($2850 Advantage