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A customer, Mr K, has requested Leo Co. to fill a special order for 18,000 units of product L for $41 per unit. Product L's

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A customer, Mr K, has requested Leo Co. to fill a special order for 18,000 units of product L for $41 per unit. Product L's normal unit product cost is $28.8, including direct material $6.2, direct labor $3 (3 minutes per unit of L produced), variable manufacturing overhead $12.8 and fixed manufacturing overhead $6.8. All the costs are variable, except fixed manufacturing overhead costs. The estimated selling price for regular sales is $50 per unit. There is a special requirement in the special order that requires modifications made to product L which would increase the variable costs by $10 per unit. Besides, it would also require an investment of $72,000 in a special mold so as to perform the modification. There is no salvage value for the special mold. Required: (a) The special order would have no effect on the company's total fixed manufacturing overhead costs as there is excess spare capacity sufficient to cope with the special order. It would also have no effect on the company's other sales. If the special order is accepted, calculate the impact on the company's overall net operating income. (14 marks) (b) Is the fixed manufacturing overhead a relevant cost? Explain. (7 marks) (c) Assuming Leo Co. only has 4,500 direct labour hours as full production capacity, calculate the maximum number of Product L Leo Co. can produce. (3 marks) (d) Assuming Leo Co. has to sacrifice 5,000 units of regular sales in order to take up the special order of another customer, MrC, calculate the contribution lost for regular sales. (6 marks)

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