Assume that direct labor is a variable cost. the special order would have no effect on the company's total fixed manufacturing overhead costs. In this case, accepting the special order will result in a smaller financial loss of $10,500 for the company.
Generally, To determine the financial advantage or disadvantage of accepting the special order, you need to consider the costs and revenue associated with the order.
The additional variable cost per unit is $1.50, so if the company accepts the special order, it will incur additional variable costs of $1.50 per unit produced. The fixed costs associated with the special order, such as the $13,000 investment in special molds, will not change regardless of whether the company accepts the order.
To calculate the financial advantage or disadvantage of the special order, you need to consider the selling price of the product and the volume of the order. If the selling price is greater than the sum of the variable cost per unit and the fixed costs, then the special order will be financially advantageous for the company. If the selling price is less than the sum of the variable cost per unit and the fixed costs, then the special order will be financially disadvantageous for the company.
On the other hand, if the selling price is $4.00 per unit and the company produces 1,000 units as part of the special order, the total revenue from the order will be $4,000. The total variable cost for the order will be $1,500 (1,000 units * $1.50 per unit), and the total fixed cost for the order will be $13,000. The total cost for the order will be $14,500, so the financial advantage for the company will be $4,000 - $14,500 = -$10,500.
It is important to consider all of the costs and revenue associated with the special order to determine the financial impact on the company.
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