Question

The Bharu Violin Corporation has the capacity to manufacture and sell 5,000 violins each year but is currently only manufacturing and selling 4,800. The following data relate to annual operations at 4,800 units: Per Violin Selling price $ 600 Manufacturing costs: Variable $ 130 Fixed $ 270 Selling and administrative costs: Variable $ 20 Fixed $ 40 Woolgar Symphony Orchestra is interested in purchasing Bharu's excess capacity of 200 units but only if they can get the violins for $350 each. This special order would not affect regular sales or the total fixed costs. Assume that Bharu is manufacturing and selling at capacity (5,000 units). Any special order will mean a loss of regular sales. Under these conditions if the special order from Woolgar Symphony Orchestra is accepted, the financial advantage (disadvantage) Bharu for the year should be:

Answer 1

Answer:

Financial advantage  $40,000

Explanation:

The relevant variable cost will be determined as follows

Unit variable cost = 130+20 = 150.

                                                                                               $

Sales from special order ( 200 × $350)=                       70,000

Variable cost ( 200× 150)=                                            (30,000 )

Financial advantage                                                       40,000

Note that the fixed  manufacturing and selling costs were not included in the analysis, simply because they are not relevant. In other words,  whether or not the special order is accepted these fixed  costs of would be concurred either way.

Financial advantage  $40,000