Solution:
Part 1 -
It is given in the question that the fixed manufacturing cost is $322,000 every year within production range of 40,000 to 46,000 rets. So the company will not incur any additional fixed manufacturing cost even if they make or do not make additional 6,000 Units over 40,000 units. Also fixed selling expenses are not relevant to decision making since this cost has already been incurred and not relevant.
Direct materials, direct labor and variable expenses are relevant since they will incur for the special order. Machine Cost is a special cost for special equipment to accomplish this special order hence this will also consider in calculation of increase or decrease in profit.
Calculation of financial advantage/(disadvantage) of accepting the special order |
||
Per Unit |
6,000 Rets |
|
Sale Price ($51 - 16% discount) |
$42.84 |
$257,040 |
Incremental Cost: |
||
Direct materials |
$20.00 |
$120,000 |
Direct labor |
$6.00 |
$36,000 |
Variable Manufacturing Overhead |
$3.00 |
$18,000 |
Variable selling expense ($4 - 75% Slashed) |
$1.00 |
$6,000 |
Plus: Machine Cost |
$12,000 |
|
Total Cost |
$192,000 |
|
Increase in Profits (Financial advantages) |
$65,040 |
Part 2 –
The army will reimburse all the variable and fixed cost along with fixed fee.
Fixed Fee on 6,000 Rets @ $1.4 per Ret | $8,400 |
Reimbursement of Fixed Manufacturing Cost 6,000 Rets @ $7 per ret | $42,000 |
Total Increase in Profit | $50,400 |
Financial advantage of accepting US Army order | $50,400 |
Part 3 –
Calculation of Profit when units sold in Regular Channel
Per Unit |
6,000 Rets |
|
Sale Price |
$51.00 |
$306,000 |
Incremental Cost: |
||
Direct materials |
$20.00 |
$120,000 |
Direct labor |
$6.00 |
$36,000 |
Variable Manufacturing Overhead |
$3.00 |
$18,000 |
Variable selling expense |
$4.00 |
$24,000 |
Total Relevant Cost |
$198,000 |
|
Increase in Profits when sold in Regular Channel |
$108,000 |
|
Increase in profits when sold to US Army (Refer Part 2) |
$50,400 |
|
Financial disadvantage (Loss) due to foregoing sales
through regular channel for selling to US Army |
$57,600 |
The Rets normally sell for $51 each. Fixed manufacturing overhead is $322,000 per year within the range of 40,000 through 46,000 Rets per year.
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