Question

Stuart Concrete Company pours concrete slabs for single-family dwellings. Lancing Construction Company, which operates outside Stuart’s normal sales territory, asks Stuart to pour 46 slabs for Lancing’s new development of homes. Stuart has the capacity to build 480 slabs and is presently working on 160 of them. Lancing is willing to pay only $2,640 per slab. Stuart estimates the cost of a typical job to include unit-level materials, $960; unit-level labor, $440; and an allocated portion of facility-level overhead, $1,300.

Required

Calculate the contribution to profit from the special order. Should Stuart accept or reject the special order to pour 46 slabs for $2,640 each?

Contribution to profit Should Stuart accept or reject the special order?

Answer 1

Variable cost varies with number of units produced or sold so it is always a relevant cost while making decision as to acceptance of offer as same is an incremental cost .(in the given problem ,unit material ,unit labor cost is relevant to decision making)

Fixed cost remains constant within a relevant range and does not varies with output thus it is irrelevant to decision making.(in the given problem ,allocated facility overhead cost is irrelevant as same will be incurred whether offer is accepted or not)

Since Stuart Concrete Company has enough capacity to accept lancing company offer (without affecting regular sales) 480--160= 320 .

a)

Special offer price	2640
less:Unit level material cost	-960
Unit level labor	-440
Profit per slab	1240
number of slab	46
Total profit /contribution	1240*46= 57040

b)Stuart should accept the special order as there is a total profit of $ 57040