Question

Harrison Ford Company has been approached by a new customer with an offer to purchase 10,000 units of its model IJ4 at a price of $5 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Harrison normally produces 75,000 units of IJ4 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the normal level of activity is as follows: Fixed overhead will not be affected by whether or not the special order is accepted.

Direct Materials $1.75
Direct Labor 2.50
Variable Overhead 1.50
Fixed Overhead 3.25
Total $9.00

What are the relevant costs and benefits of the two alternatives (accept or reject the special order)?

Answer 1

Answer:

$57,500 ;  $50,000 ; Reject

Explanation:

Company has been approached by a new customer with an offer to purchase 10,000 units of its model IJ4 at a price of $5 each,

Relevant Benefits:

= Units purchase × price of each

= 10,000 × $5

= $50,000

Relevant Costs = Direct Material + Direct Labor + Variable Overhead

                          = 10,000 × ($1.75 + $2.50 + $1.50)

                          = $57,500

Reject the Special Order as relevant costs are higher than the relevant benefits.