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

Exercise 47

Special Order

Hi-Speed Electronics manufactures low-cost, consumer-grade computers. It sells these computers to various electronics retailers to market under store brand names. It manufactures two computers, the Lightning 2.0 and the Lightning 2.4, which differ in terms of speed, included memory, and included hard drive capacity. The following information is available:

Costs per Unit	Lightning 2.0	Lightning 2.4
Direct materials	$ 65	$ 75
Direct labor	30	40
Variable overhead	15	20
Fixed overhead	90	120
Total cost per unit	$200	$ 255
Price	$290	$390
Units sold	4,000	2,000

The average wage rate is $20 per hour. Variable overhead varies with the quantity of direct labor hours. The plant has a capacity of 20,000 direct labor-hours, but current production uses only 10,000 direct labor-hours.

Required

a. A nationwide discount chain has offered to buy 2,500 Lightning 2.0 computers and 2,500 Lightning 2.4 computers if the price is lowered to $200 and $250, respectively, per unit. If Hi-Speed accepts the offer, how many direct labor-hours will be required to produce the additional computers? How much will the profit increase (or decrease) if Hi-Speed accepts this proposal? Prices on regular sales will remain the same.

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b. Suppose that the nationwide discount chain has offered instead to buy 3,500 each of the two models at $200 and $250, respectively. This customer will purchase the 3,500 units of each model only in an all-or-nothing deal. That is, Hi-Speed Electronics must provide all 3,500 units of each model or none. Hi-Speed’s management has decided to fill the entire special order for both models. In view of its capacity constraints, Hi-Speed will reduce sales to regular customers as needed to fill the special order. How much will the profits change if the order is accepted? Assume that the company cannot increase its production capacity to meet the extra demand.

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c. Answer the question in requirement (b), assuming instead that the plant can work overtime. Direct labor costs for the overtime production increase to $30 per hour. Variable overhead costs for overtime production are $5 per hour more than for normal production.

Step 1 of 21

Special order:

Special order is an order placed by a customer by entering into an agreement or by sending the purchase order of the requirement. This order is in addition to the regular production of the company. A manufacturing company will decide about the special order by preparing a schedule to calculate the profit or loss from the special order taken.