Question

Lakeside Inc. produces a product that currently sells for $68.00 per unit. Current production costs per unit include direct materials, $25; direct labor, $27; variable overhead, $12.50; and fixed overhead, $12.50. Product engineering has determined that certain production changes could refine the product quality and functionality. These new production changes would increase material and labor costs by 20% per unit. Lakeside has received an offer from a nonprofit organization to buy 9,500 units at $66.50 per unit. Lakeside currently has unused production capacity.

Required: a. Calculate the effect on Lakeside's operating income of accepting the order from the nonprofit organization.

Answer 1

Fixed cost is a cost that will be incurred whether product is internally manufactured or outsourced ,thus it is irrelevant to decision making .

Incremental Benefit /savings per unit
Direct material [25 (1+.20)	30
Direct labor [27 (1+.20)]	32.4
Variable overhead [12.50 (1+.20)]	15
Total incremental savings per unit	77.4
less;Incremental cost	-66.5
Net profit /(loss) per unit	10.9
Number of units	9500
Total incremental profit	9500*10.9=103550

The operating income will increase by 103550 if order is accepted .