Question

Brief Exercise 8-17 Structuring a Special-Order Problem Harrison Ford Company has been approached by a new customer with an offer to 10,000 units of its model IJ5 at a price of $5 each. The new customer is geographically rated from the company's other customers, and existing sales would not be affected. Harrison normally produces 75,000 units of IJ5 per year but only plans to produce and sell 60,000 coming year. The normal sales price is $12 per unit. Unit cost information for the normal of activity is as follows: purchase sepa

Answer 1

Statement Showing Contribution Margin - on accepting the Special Order of 10000 Units of Model IJ5

Sr.No	Particulars	Per Unit ($)	Total Amount ($)
A	Incremental Sales Revenue	$5.00	$50,000.00
B	Incremental Relevant cost
	Direct Material	1.75	17500.00
	Direct Labor	2.50	25000.00
	Variable Overhead	1.50	15000.00
	Relevant Cost Of Accepting The Order	$5.75	$57,500.00
A-B	Incremental Operating Income (Loss)	($0.75)	($7,500.00)

.

If the order is accepted, then operating income will decrease by $7500/-

Recommendation:- On the basis of above calculations, it is recommended that special order of 10000 units of IJ5 should be rejected.

Note : - Fixed Overheads are irrelevant for decision making as it is a sunk cost.