Answer a. If special order is accepted the current profit will increase by $720
Answer b. The minimum price is the relevant cost that will be incurred if order is accepted and that is $4.05 per unit below this if the order is accepted the profit will decrease
Note: Relevant cost is the cost which is incurred for the special order and the cost which will not be affected is not relevant so fixed cost which will remain same is not taken for the calculation of the answers as it is not relevant.
Detailed workings
Answer a. | Calculation of advantage or disadvantage from special order | |||
Per unit cost | Units | Total | ||
Revenue form special order | 5.85 | 400 | $ 2,340 | |
Less: Relevant cost of special order | ||||
Direct material | 2.7 | 400 | $ 1,080 | |
Direct material | 0.9 | 400 | $ 360 | |
Variable Manufacturing overhead | 0.45 | 400 | $ 180 | |
Financial advantage form accepting order | $ 720 | |||
Answer b. | Calculation of minimum pricefrom special order without affecting profit | |||
Relevant cost of special order | ||||
Direct material | $ 2.70 | |||
Direct material | $ 0.90 | |||
Variable Manufacturing overhead | $ 0.45 | |||
Minimum selling price without affecting profit | $ 4.05 |
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