Question

Situation Two Rutro Corp. produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 60,000 units per month is as follows: Direct material $74.00 Direct labor 20.00 Variable manufacturing overhead 6.00 21.00 8.00 Fixed manufacturing overhead Variable selling and administrative expense Fixed selling and administrative expense Total 19.00 $148.00 The normal selling price of the product is $173.00 per unit. An order has been received from an overseas customer for 11,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $6.00 less per unit on this order than on normal sales. Direct labor is a variable cost in this company.

Answer 1

1.
Calculation of operating cost for producing 11000 units
Pariculars	$
Direct Material	74
Direct Labour	20
Variable manufacturing overhead	6
Variable selling & administrating overhead	2
Total variable cost	102
Calculation of incremental revenue
Pariculars	$
Selling price of special order	136
incremental cost of special order	102
Net Gain	34
Hence the Increse in operating income is $ 374000 ($34*11000)
2.
Calculation of opportunity cost
For calculation of opportunity cost we need to first calculate the comtribution per unit
Pariculars	for normal order	for special order
	$	$
Selling Price	148	136
Less: Direct Material	74	74
Less: Direct Labour	20	20
Less: Variable manufacturing overhead	6	6
Less:Variable selling & administrating overhead	8	2
Contribution per unit	40	34
Hence, from the above calculation it could be seen that if we accept the special order of 11000 units, we need to forego contribution of $40 for $ 34 which means a potential benefit of $ 6 per unit or $ 66000 ($6*11000) has to be given up for choosing the special order.