Question

Question 1 Answer saved Marked out of 2.00 p Flag question Special Order Total cost data follow for Glendale Manufacturing Company, which has a normal capacity per period of 8,000 units of product that sell for $60 each. For the foreseeable future, regular sales volume should continue to equal normal capacity. Direct material $100,000 Direct labor 61,600 Variable manufacturing overhead 46,000 Fixed manufacturing overhead (Note 1) 38,400 Selling expense (Note 2) 35,200 Administrative expense (fixed) 15,000 $296,200 Notes: 1. Beyond normal capacity, fixed overhead costs increase $1,800 for each 500 units or fraction thereof until a maximum capacity of 10,000 units is reached. 2. Selling expenses consist of a 6% sales commission and shipping costs of 80 cents per unit. Glendale pays only three-fourths of the regular sales commission on sales totaling 501 to 1,000 units and only two-thirds the regular commission on sales totaling 1,000 units or more. Glendale's sales manager has received a special order for 1,200 units from a large discount chain at a price of $36 each, F.O.B. factory. The controller's office has furnished the following additional cost data related to the special order: 1. Changes in the product's design will reduce direct material costs $1.50 per unit. 2. Special processing will add 20% to the per-unit direct labor costs. 3. Variable overhead will continue at the same proportion of direct labor costs. 4. Other costs should not be affected. a. Present an analysis supporting a decision to accept or reject the special order. (Round computations to the nearest cent.)

Answer 1

Solution:

Differential Analysis
Particulars	Per unit	Total
Differential revenue	$36.00	$43,200.00
Differential costs:
Direct materials	$11.00	$13,200.00
Direct labor	$9.24	$11,088.00
Variable manufacturing overhead	$6.90	$8,280.00
Selling:
Commission	$2.40	$2,880.00
Shipping (FOB Factory terms)	$0.80	$960.00
Total variable costs	$30.34	$36,408.00
Contribution margin from special order	$5.66	$6,792.00
Fixed cost increment:
Extra cost		$5,400.00
Profit on special order		$1,392.00

Solution b:

Additional profit required to reach goal of $3,600 = $3,600 - $1,392 = $2,208

Additional price per unit to be charged = $2,208 / 1200 = $1.84 per unit

Therefore lowest price glendale should receive = $36 + $1.84 = $37.84 per unit