Question
Garcia Company currently manufactures party decorations. The costs to produce one of its products Congratulations Banners are provided below: Cost per unit Direct materials $
Garcia Company currently manufactures party decorations. The costs to produce one of its products Congratulations Banners are provided below:
Cost per unit | |||
Direct materials | $ | 2 | |
Direct labor | 2 | ||
Variable manufacturing overhead | 1 | ||
Fixed manufacturing overhead | 4 | ||
Total | $ | 9 |
Garcia was approached by a customer who would like to make a one-time order for 500 of the Congratulations Banners at a price of $7.00 each. The company has excess capacity that could be used to produce the banners without reducing sales to regular customers. The special order would have no effect on Garcias fixed manufacturing overhead but it would require Garcia to use a different material for the banners, increasing direct materials costs to $3 per unit. The financial advantage (disadvantage) of accepting the special order is:
a. | ($500) | |
b. | ($1,500) | |
c. | $500 | |
d. | ($1,000) |
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