Question
Drip Inc. manufactures a moderately priced set of lawn furniture (a table and four chairs) that it sells for $225. Drip Inc. currently manufactures and
Drip Inc. manufactures a moderately priced set of lawn furniture (a table and four chairs) that it sells for $225. Drip Inc. currently manufactures and sells 6,000 sets per year. The manufacturing costs include $85 for direct materials and $45 for direct labor per set. The overhead charge per set is $35 which consists entirely of fixed costs.
Drip is considering a special purchase offer from a large retail firm, which has offered to to buy 600 sets per year for three years at a price of $150 per set. BigVal has the available plant capacity to produce the order and expects no other orders of profitable alternative uses of the plant capacity.
Required:
1. What is the total relevant cost per unit to produce the units requested by the retail firm?
2. What is the estimated net effect on annual operating income if Falco accepts the special sales order?
3. Discuss relevant non-financial considerations relevant to the decision.
Drip Inc. manufactures a moderately priced set of lawn furniture (a table and four chairs) that it sells for $225. Drip Inc. currently manufactures and sells 6,000 sets per year. The manufacturing costs include $85 for direct materials and $45 for direct labor per set. The overhead charge per set is $35 which consists entirely of fixed costs.
Drip is considering a special purchase offer from a large retail firm, which has offered to to buy 600 sets per year for three years at a price of $150 per set. BigVal has the available plant capacity to produce the order and expects no other orders of profitable alternative uses of the plant capacity.
Required:
1. What is the total relevant cost per unit to produce the units requested by the retail firm?
2. What is the estimated net effect on annual operating income if Falco accepts the special sales order?
3. Discuss relevant non-financial considerations relevant to the decision.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started