Question

A customer has requested that L Corporation fill a special order for 2,900 units of product R35 for $34 a unit. While the product would be modified slightly for the special order, product R35's normal unit product cost is $24.60:

Direct materials	$	6.50
Direct labor		6.00
Variable manufacturing overhead		3.60
Fixed manufacturing overhead		8.50
Unit product cost	$	24.60

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 R35 that would increase the variable costs by $2.10 per unit and that would require an investment of $19,000 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:

Answer 1

Incremental analysis

Incremental revenue (2900*34)		98600
Incremental cost
Direct material (2900*6.5)	18850
Direct labor (2900*6)	17400
Variable manufacturing overhead (2900*3.6)	10440
Additional variable cost (2900*2.1)	6090
Special molds	19000
Total incremental cost		71780
Incremental profit (loss)		26820

The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be: $26820