Question

E Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 58,000 units per month is as follows:

	Per Unit
Direct materials	$	51.60
Direct labor	$	9.90
Variable manufacturing overhead	$	2.90
Fixed manufacturing overhead	$	20.90
Variable selling & administrative expense	$	5.40
Fixed selling & administrative expense	$	26.00

The normal selling price of the product is $122.10 per unit. An order has been received from an overseas customer for 3,800 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $3.00 less per unit on this order than on normal sales. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $94.40 per unit. The monthly financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Answer 1

Financial advantage or (disadvantage) of special order:

Selling price = $94.40
Less: Variable costs:
Direct material = $51.60
Direct labor = $9.90
Variable manufacturing overhead = $2.90
Variable selling & admin costs ($5.4 - $3) = $2.40
Contribution margin = $27.6

Total financial advantage of accepting the special order is ($27.60 * 3800 units) = $104,880

Here fixed costs are not relevant because there is no change in fixed costs due to this special order.