Question

Gallerani Corporation has received a request for a special order of 5,000 units of product A90 for $28.50 each. Product A90's unit product cost is $27.85, determined as follows:

Direct materials	$	3.35
Direct labor		8.65
Variable manufacturing overhead		7.75
Fixed manufacturing overhead		8.10
Unit product cost	$	27.85

Assume that direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product A90 that would increase the variable costs by $4.80 per unit and that would require an investment of $15,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Multiple Choice

• $(35,750)

• $4,750

• $3,250

• $(92,750)

Answer 1

B. $4,750

Incremental revenue (5,000 units × $28.50 per unit)	$142,500
Less incremental costs:
Direct materials (5,000 units × $3.35 per unit)	$16,750
Direct labor (5,000 units × $8.65 per unit)	$43,250
Variable manufacturing overhead [5,000 units × ($7.75 per unit + $4.80 per unit)]	$62,750
Special molds	$15,000
Total incremental cost	$137,750
Financial advantage (disadvantage)	$4,750