Answer:
additional revenue = $26,250
relevant costs:
direct materials =350 x $82 = $28,700
direct labor = 525 x $15 = $7,875
setup hours = 1 x $5 = $5
inspection costs = 20 x $5 = $100
machining = 175 x $3 = $525
total relevant costs = $37,205
1) change in income if order is accepted:
total revenue - total relevant costs = $26,250 - $37,205 = -$10,955
the company will incur in $10,955 in losses if order is accepted.
2) if direct materials are reduced by $13 per unit = $13 x 350 = $4,550, and direct labor costs can be reduced by 0.5 x 350 = 175 hours (= 175 x $15 = $2,625) ⇒ total relevant costs will decrease by $7,175.
It is now a <u>$3,780</u> (= $10,955 - $7,175) loss if the special order is accepted.
