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The Millenium Company has been approached by a new customer with an offer to purchase 10,000...

Question:

The Millenium Company has been approached by a new customer with an offer to purchase 10,000 units of its model F80 at a price of $3.90 each.

The new customer is geographically separated from the company's other customers, and existing sales would not be affected.

Millenium normally produces 75,000 units of F80 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 :

Direct materials $1.75
Direct labor $2.50
Variable overhead $1.50
Fixed overhead $3.25
Total $9.00

Fixed overhead will not be affected by whether or not the special order is accepted.

1. Should the company accept or reject the special order?

2. By how much will operating income increase or decrease if the order is accepted?

Special order:

A special order is customer one-time order, usually on large quantities at a lower price. Proper evaluation of the special order should be done as this may result to an additional net income or decrease the net income depending on the impact. As a rule, the selling price should always exceed the incremental cost incurred to make the order.

Answer and Explanation: 1

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1. The company should reject the special order. As an initial assessment, the selling price of the special order is only $3.90 per unit , the cost to...

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Identifying Relevant Costs in Accepting an Order

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Chapter 9 / Lesson 8
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As orders sometimes come with increased costs, it is important to identify all relevant costs before accepting a given order. Learn the types of special orders, and the considerations for three types of cost: relevant, variable, and fixed costs.


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