Question

EXERCISE 12–14 Special Order [LO4] Glade Company produces a single product. The costs of producing and selling a single unit of this product at the company's current activity level of 8,000 units per month are: Direct materials Direct labor. Variable manufacturing overhead. Fixed manufacturing overhead Variable selling and administrative expenses. Fixed selling and administrative expenses.. $2.50 $3.00 $0.50 $4.25 $1.50 $2.00 The normal selling price is $15 per unit. The company's capacity is 10,000 units per month. An order has been received from a potential customer overseas for 2,000 units at a price of $12.00 per unit. This order would not affect regular sales. Required: 1. If the order is accepted, by how much will monthly profits increase or decrease? (The order would not change the company's total fixed costs.) 2. Assume the company has 500 units of this product left over from last year that are inferior to the current model. The units must be sold through regular channels at reduced prices. What unit cost is relevant for establishing a minimum selling price for these units? Explain.

Answer 1

1. Increase in Monthly Profit if order is accepted:

Selling Price p.u.	$12
-Direct Materials p.u.	-$2.50
-Direct Labour p.u.	-$3
-Variable Mfg OH	-$0.50
-Variable S&A Expenses	-$1.50
Total Profit p.u	$4.50
No. of units	2000
Total Increase in Profit	$9,000.00

2. 500 units of the product are already manufactured in the last year. So manufacturing costs, which are already incurred are not Relevant. Fixed Costs are also not relevant. Thus, now only Variable Selling & Adminstrative expense will be Relevant for establishing a minimum selling price per unit.