Cost Accounting - Exercise 17.3 Special-Order Decision, Alternatives, Relevant C
ID: 2425707 • Letter: C
Question
Cost Accounting - Exercise 17.3
Special-Order Decision, Alternatives, Relevant Costs. Please help answer the bold BLANK answer! thanks
Sequoia Paper Products, Inc., manufactures boxed stationery for sale to specialty shops. Currently, the company is operating at 80 percent of capacity. A chain of drugstores has offered to buy 34,000 boxes of Sequoia’s blue-bordered thank-you notes as long as the box can be customized with the drugstore chain’s logo. While the normal selling price is $6.30 per box, the chain has offered just $3.30 per box. Sequoia can accommodate the special order without affecting current sales. Unit cost information for a box of thank-you notes follows:
Fixed overhead is $398,000 per year and will not be affected by the special order. Normally, there is a commission of 5 percent of price; this will not be paid on the special order since the drugstore chain is dealing directly with the company. The special order will require additional fixed costs of $15,100 for the design and setup of the machinery to stamp the drugstore chain’s logo on each box.
Required:
1. Which alternative is more cost effective and by how much?
A: Accept the special order
The operating income would increase by $ BLANK ANSWER
Direct materials $2.20 Direct labor 0.35 Variable overhead 0.07 Fixed overhead 2.15 Total cost per box $4.77Explanation / Answer
ADditional contribution from special offer = [ 3.3 - (2.2+.35+.07) ] = .68
Total contribution = .68 * 34000 = 23120
Less:additional fixed cost - 15100
operating income will increase by = 8020