Question

Structuring a Special-Order Problem Recently Wang Company was been approached by a new customer with an offer to purchase 10,000 units of its model I34 at a price of $4.55 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Normally Wang Company produces 75,000 units of I34 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the normal level of activity is as follows: $1.75 Direct materials 2.50 Direct labour 1.50 Variable overhead 3.25 Fixed overhead $9.00 Total Fixed overhead will not be affected by whether or not the special order is accepted Required: 1. What are the relevant costs and benefits of the two alternatives? The input in the box below will not be graded, but may be reviewed and considered by your instructor Are relevant costs or benefits are attached to rejecting the order? 2. By how much will operating income increase or decrease if the order is accepted? by $ Next Previous

Answer 1

Answer 1

Relevant cost = $ 5.75

Explanation

Relevant Cost = Direct material + Direct labor + variable Overhads

= $ 1.75 + $ 2.50 + $ 1.50

= $ 5.75

Answer 2

Are the relevant cost attached to rejecting the order? = YES

Answer 3

Decrease by $ 12,000

Calculations:

($ 5.75 - $ 4.55) * 10,000 units

= $ 12,000

In case of any doubt, please comment.