Using Differential Analysis: Nubo Manufacturing, Inc., is presently operating at 50 percent of practical capacity and producing about 50,000 units annually of a patented electronic component. Nubo recently received an offer from a company in Yokohama, Japan, to purchase 30,000 components at $6 per unit. No other orders are foreseen. Nubo has not previously sold components in Japan. Budgeted production costs for 50,000 and 80,000 units of output follow:

The sales manager thinks the order should be accepted, even if it results in a loss, because she feels the sales may build up future markets. The production manager does not wish to have the order accepted. primarily because the order would show a loss of $.25 per unit when computed on the new average unit cost.

Required:

a. Explain what caused the drop in cost from $7 per unit to $6.25 per unit when budgeted production increased from 50,000 to 80,000 units. Show supporting computations.

b. Should the order from the company in Yokohama be accepted?

Transcribed Image Text:

Units 50,000 80,000 Costs: Direct materials $ 75,000 $120,000 Direct labor 75,000 120,000 Factory overhead 200,000 260,000 Total costs $350,000 $500,000 Cost per unit $7.00 $6.25