Please use the following information for problems 1 and 2: Cost per unit of tabl
ID: 2520518 • Letter: P
Question
Please use the following information for problems 1 and 2:
Cost per unit of tables:
Direct materials $50
Direct labor (all variable) 40
Variable manufacturing overhead 10
Fixed manufacturing overhead 8
Variable marketing costs 7
Fixed marketing costs 5
___
Total cost per unit $120
The Smith Company normally sells these tables for $150 each. The company has just received a special order from a customer for 200 tables, but the customer only wants to pay $110 per table. Because the tables would have a different design than the tables the Smith Company normally sells, the company will need to buy a special tool to make the tables, and this tool will be discarded after the 200 tables are made. No marketing costs will be incurred for this order, and the company has enough spare capacity to accept this order and still satisfy all of its other customers.
If the special tool costs $800, how much will the Smith Company’s profit increase or decrease if it accepts the order and sells the 200 tables to this customer for $110 each? Should it accept the order in this case?
If the special tool costs $2,800, how much will the Smith Company’s profit increase or decrease if it accepts the order and sells the 200 tables to this customer for $110 each? Should it accept the order in this case?
Explanation / Answer
1 Per unit Total 200 tables Incremental revenue 110 22000 Incremental costs: Variable costs: Direct materials 50 10000 Direct labor 40 8000 Variable manufacturing overhead 10 2000 Total variable cost 100 20000 Fixed costs: Purchase of special tool 800 Total Incremental costs 20800 Incremental net operating income(loss) 1200 Yes, accept the order 2 Per unit Total 200 tables Incremental revenue 110 22000 Incremental costs: Variable costs: Direct materials 50 10000 Direct labor 40 8000 Variable manufacturing overhead 10 2000 Total variable cost 100 20000 Fixed costs: Purchase of special tool 2800 Total Incremental costs 22800 Incremental net operating income(loss) -800 No, do not accept the order