Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 36

Special Order

Mission Electronics manufactures and sells basic DVD players for sale under various generic store brand names. The cost of one of their models follows:

Materials	$18.00
Labor	12.00
Variable overhead	5.00
Fixed overhead ($2,700,000 per year; 450,000 units per year)	6.00
Total	$41.00

Pacific Cash&Carry, a chain of low-price electronic sales and rental outlets, has asked Mission to supply them with 30,000 players for a special promotion Pacific is planning. Pacific has offered to pay Mission a unit price of $42 per DVD player. The regular selling price is $60. The special order would require some modification to the basic model. These modifications would add $4.00 per unit in material cost, $1.50 per unit in labor cost, and $0.50 in variable overhead cost. Although Mission has the capacity to produce the 30,000 units without affecting its regular production of 450,000 units, a one-time rental of special testing equipment to meet Pacific’s requirements would be needed. The equipment rental would be $45,000 and would allow Mission to test up to 50,000 units.

Required

a.Prepare a schedule to show the impact of filling the Pacific order on Mission’s profits for the year.

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b.Would you recommend that Mission accept the order?

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c.Considering only profit, what is the minimum quantity of DVD players in the special order that would make it profitable?

Step 1 of 4

Special order:

Special order is an order which do not reoccur and will not affect regular sales of an organization. However, special order can be accepted when the operating profit is more than the regular profit.