Question

Walton Company manufactures a personal computer designed for use in schools and markets it under its own label. Walton has the capacity to produce 44,000 units a year but is currently producing and selling only 12,000 units a year. The computer’s normal selling price is $1,690 per unit with no volume discounts. The unit-level costs of the computer’s production are $520 for direct materials, $200 for direct labor, and $200 for indirect unit-level manufacturing costs. The total product- and facility-level costs incurred by Miko during the year are expected to be $2,280,000 and $804,000, respectively. Assume that Miko receives a special order to produce and sell 3,030 computers at $1,250 each.

Required
Calculate the contribution to profit from the special order. Should Walton accept or reject the special order?

Answer 1

Since the company has the capacity to produce the special order, the variable costs are the only relevant costs to be considered
for decision making.
Selling price per unit of special order	$1,250
Direct Materials	$520
Direct labor	$200
Manufacturing costs	$200
Total variable costs per unit	$920
Profit on each special order	$330
Contribution to profit on special order =3030 units*$330 =$999,900