Question

At the Kicher Company’s current activity level of 8,000 units per month, the costs of producing and selling one unit of the company’s only product are as follows:

Direct materials	$5.00
Direct labour	$6.00
Variable manufacturing overhead	$1.00
Fixed manufacturing overhead	$9.00
Variable selling and administrative expenses	$3.00
Fixed selling and administrative expenses	$4.00

The normal selling price is $26 per unit. An order has been received from a potential customer overseas for 4,000 units at a price of $24.00 per unit. This order would not affect regular sales. The company’s capacity is 12,000 units per month and enough excess capacity exists to fill this order.

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.

Exercise 12-10 SPECIAL ORDER Total for Per Unit 4,000 Units 1. Monthly profits would be increased by: Incremental revenue Incremental costs: Variable costs: Total variable cost... Fixed costs: Total incremental cost... Incremental operating income.

Answer 1

Requirement 1

Solution

Increase in income will be $36,000

Working

1. Monthly profit would be incurred by:	Per unit	Total for 4000 Units
Incremental Revenue	$     24.00	$ 96,000.00
Incremental cost
Variable costs
Direct material	$       5.00	$ 20,000.00
Direct labor	$       6.00	$ 24,000.00
Variable manufacturing overhead	$       1.00	$    4,000.00
Variable selling and administrative expenses	$       3.00	$ 12,000.00
Total Variable cost	$     15.00	$ 60,000.00
Fixed Cost :
Total Incremental Cost		$ 60,000.00
Incremental Operating Income		$ 36,000.00

Requirement 2

Minimum price will be $3.

Only selling cost will be relevant cost because all the manufacturing cost is already done hence that manufacturing cost is sunk cost and irrelevant in the case of 500 units.