Question - Majestic Company manufactures a product which has the following unit costs: direct materials, $10; direct labor, $7; variable overhead, $4; and general fixed overhead allocated, $5 (The total fixed costs will remain the same within the relevant range). Although production capacity is 90,000 units per year, the company expects to produce only 75,000 units next year. The product normally sells for $28 each. A customer has offered to buy 14,000 units for $26 each. There are no legal ramifications if this special order is accepted. Required: Calculate the following (Make sure you show you work)
a. What is the relevant (incremental) cost to make a unit for the special order?
b. What is the effect on Majestic's income if the special order is accepted? Another way to ask this question, what is the profit/loss on the special order?
c. Should the company accept the special order? Why?