Question

The Young Company has gathered the following information for a unit of its most popular product:

Direct materials	$	11
Direct labor		6
Overhead (40% variable)		15
Cost to manufacture		32
Desired markup (50%)		16
Target selling price	$	48

The above cost information is based on 11,900 units. A distributor has offered to buy 2,500 units at a price of $36 per unit. This special order would not disturb regular sales. Special packaging and other selling expenses would be an additional $0.40 per unit for the special order. If the special order is accepted, Young's operating profits will increase by:

• $9,000

• $31,500

• $7,500

• $10,000

Answer 1

Correct answer---------$31,500

Working

Calculation of Additional Cost of Order
	Per Unit	Total
Direct material	$                11.00	$          27,500.00
Direct labor	$                   6.00	$          15,000.00
Variable manufacturing overheads	$                   6.00	$          15,000.00
Special packaging and other selling expenses	$                   0.40	$            1,000.00
Total Additional cost due to acceptance of order	$                23.40	$          58,500.00

Fixed overhead cost will not increase due to acceptance of order hence fixed overhead cost is not included above.

.

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (2500 x $36)	$        90,000.00
Less: Total Additional cost due to acceptance of offer	$        58,500.00
Financial Advantage	$        31,500.00