Question

Time Unlimited makes grandfather clock kits that it sells to hobbyists who then assemble and finish the clocks. The company has the capacity to make 5,000 of the kits, and its current volume is 3,000 kits. The costs of a clock kit are: $300 for unit-level materials, $200 for unit-level labor, and $150 for an allocation of facility-level overhead. The normal selling price is $950. The Clock Builder has received a special order for 600 clock kits at a price of $600 each.
Required:
Should The Clock Builder accept the special order? Support your answer with appropriate computations.

Answer 1

Answer:

Yes

Time Unlimited will have a Financial Advantage of $ 60,000

Explanation:

Hint : Consider the Incremental Costs and Incremental Revenues that come with the Special Order.

Note that taking up the Special Order, the Time Unlimited is utilizing the spare  capacity of 2,000 kits hence there will not be any change in fixed cost.Thus allocation of service level overhead is irrelevant as this would be incurred whether the order is taken up or not.

Incremental Costs and Revenues

Sales ( 600 clock kits × $600 )                            $360,000

Materials ( 600 clock kits × $300 )                      ($180,000)

Labor ( 600 clock kits ×  $200 )                          ($120,000)

Financial Advantage                                              $60,000