Digital Devices, Incorporated has received a special order to manufacture 10,000 CD ROM drives for an Italian computer manufacturer. Digital determines that the order will not affect its current domestic sales of CD ROM drives and because of the special nature of the order no sales commission would be paid. However, to process the order for export, an additional handling cost of $10 per unit is estimated. The order indicates that the price of the drives cannot exceed $200.

The company has the capacity to produce 100,000 units annually but is currently operating at 75% of available capacity. Unit selling price and costs, based on estimated actual capacity being utilized, are as follows:

Selling price	$ 260
Expenses:
Direct materials	$ 80
Direct labor	40
Variable manufacturing overhead	50
Fixed manufacturing overhead	30
Sales commission	26
Fixed administrative expenses	8
Total	$ 234

Required:

1. Prepare a relevant cost analysis showing the effect on profit if the company accepts the special order.
2. How would your analysis change if Digital Devices, Incorporated, was producing and selling 100,000 units annually?A) Prepare a relevant cost analysis showing the effect on profit if the company accepts the special order.

Should there be something under export handling cost?

Digital Devices, Incorporated
Effect of Special Order on Profits
	Per Unit	Total
Sales	$200	$2,000,000
Less relevant costs:
Direct materials	80	800,000
Direct labor	40	400,000
Variable manufacturing overhead	50	500,000
Export handling cost	10	100,000
Loss on special order	$20	$200,000

• B)How would your analysis change if Digital Devices, Incorporated, was producing and selling 100,000 units annually?

Digital Devices, Incorporated
	Per Unit	Total
Sales	$200	$2,000,000
Less relevant costs:
Direct materials	80	800,000
Direct labor	40	400,000
Variable manufacturing overhead	50	500,000
Export handling cost	10	100,000
Lost contribution margin on current sales	64
Loss on special order	$(44)	$(440,000)