Question

Can you help?

	ON Company manufactures windows. Its manufacturing plant has the capacity to produce 12,000 windows each month. Current production and sales are 10,000 windows per month. The company normally charges $250 per window. Cost information for the current activity level is as follows:
	Variable Costs (per unit)
		Direct Material						$60
		Direct Manufacturing labour						$75
	Variable Costs (material handling, quality control, etc)							$15
	Fixed manufacturing costs							$250,000
	Fixed marketing costs							$400,000
	ON has just received a special one-time-only order for 2,000 windows at $225 per window. Accepting the special order would not affect the company’s regular business or its fixed costs.
	Prepare based on totals units and total revenue/costs
	Required:
	1	Should ON accept this special order? What is the benefits to the company. Show your calculations.
	2	Suppose plant capacity were only 10,000 windows instead of 12,000 windows each month. The special order must either be taken in full or be rejected completely. Should ON accept the special order? Why or Why not? Show your calculations.

Answer 1

Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

ON Company
Answer 1
To decide whether to accept this special order or not we have to calculate incremental income from the special order. The workings are below:
Incremental income statement
	Amount $	Note
Sales volume	2,000.00	A
Sell Price	225.00	B
Less: Variable cost per unit
Direct Material	60.00
Direct Manufacturing labor	75.00
Other Variable Costs	15.00
Total Variable cost per unit	150.00	C
Contribution margin per unit	75.00	D=B-C
Total Contribution	150,000.00	E=A*D
Incremental income	150,000.00	See E
Accepting the special order will have incremental income of $ 150,000. So yes the order should be accepted.
What is the benefits to the company?
$ 150,000 is the benefits to the company.
Answer 2
To decide whether to accept this special order or not we will compare income in both the cases:
	No special order	Special order
	Amount $	Amount $	Note
Sales volume	10,000.00	8,000.00	F
Sell Price	250.00	250.00	G
Less: Variable cost per unit
Direct Material	60.00	60.00
Direct Manufacturing labor	75.00	75.00
Other Variable Costs	15.00	15.00
Total Variable cost per unit	150.00	150.00	See C
Contribution margin per unit	100.00	100.00	H=G-C
Total Contribution	1,000,000.00	800,000.00	I=F*H
Less: Fixed costs
Fixed manufacturing costs	250,000.00	250,000.00
Fixed marketing costs	400,000.00	400,000.00
Total Fixed costs	650,000.00	650,000.00	J
Add: Incremental income from special order		150,000.00	See E
Net operating income	350,000.00	300,000.00	K=I-J+E
Reduced by		50,000.00
Accepting the special order will reduce Net operating income by $ 50,000. So the order should not be accepted.