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Problem 14-45 Special Order Financial and Production Considerations (LO 14-4, 14-5)
Problem 14-45 Special Order Financial and Production Considerations (LO 14-4, 14-5)
Problem 14-45 Special Order; Financial and Production Considerations (LO 14-4, 14-5)
Additional data:
The normal selling price of model no. 43 is $26.50; however, Venus has offered Jupiter only $15.75 because of the large quantity it is
willing to purchase.
Venus requires a modification of the design that will allow a $2.10 reduction in direct-material cost.
Jupiter’s production supervisor notes that the company will incur $3,700 in additional setup costs and will have to purchase a $2,400
special device to manufacture these units. The device will be discarded once the special order is completed.
Total manufacturing overhead costs are applied to production at the rate of $20 per machine hour. This figure is based, in part, on
budgeted yearly fixed overhead of $750,000 and planned production activity of 60,000 machine hours (5,000 per month).
Jupiter will allocate $1,800 of existing fixed administrative costs to the order as “... part of the cost of doing business.”
References
Required:
1-a. Calculate the net profit increase or (decrease) from accepting the special order.
1-b. Assume that present sales will not be affected. Should the order be accepted from a financial point of view (i.e., is it profitable)?
Req 1A Req 1B
Calculate the net profit increase or (decrease) from accepting the special order. (Do not round intermediate calculations.)
Increase (decrease) to
$ 34,050
profit
Req 1A Req 1B
References
Required:
1-a. Calculate the net profit increase or (decrease) from accepting the special order.
1-b. Assume that present sales will not be affected. Should the order be accepted from a financial point of view (i.e., is it profitable)?
Complete this question by entering your answers in the tabs below.
Req 1A Req 1B
Calculate the net profit increase or (decrease) from accepting the special order. (Do not round intermediate calculations.)
Req 1A Req 1B
Explanation:
1-a.
Yes, the order should be accepted because it generates a profit of $34,050 for the firm. Note: The fixed administrative cost is irrelevant
to the decision, because this cost will be incurred regardless of whether Jupiter accepts or rejects the order.
*Fixed manufacturing overhead: $750,000 ÷ 60,000 machine hours = $12.50 per hour
Variable manufacturing overhead: $20.00 – $12.50 = $7.50