(Special order) Farmer’s Wire Co. produces 15-gauge barbed wire that is re¬ tailed through farm supply companies. Presently, the company has the ca¬ pacity to produce 50,000 tons of wire per year. It is operating at 85 percent of annual capacity, and at this level of operations, the cost per ton of wire is as follows:

The average sales price for the output produced by the firm is $800 per ton. The state of Texas has approached the firm to supply 200 tons of wire for the state’s prisons for $580 per ton FOB Farmer’s Wire Co. plant. No pro¬ duction modifications would be necessary to fulfill the order from the state of Texas.

a. What costs are relevant to the decision to accept this special order?

b. What would be the dollar effect on pre-tax income if this order were ac¬
cepted?LO.1  

Transcribed Image Text:

Direct material Direct labor Variable overhead Fixed overhead Total $440 60 50 160 $710