Problem 5 (20 points): Amherst produces a single product. The company's March 2010 income statement is as follows:
- Sales $72,000
- Cost of goods sold - 54,000
- Gross profit $ 18,000
- Selling and administrative 5,000
- Net income $ 13,000
There were no beginning or ending inventories of work-in-process or finished goods. Amherst's full manufacturing costs were as follows:
- Direct materials (1,200 units x $10)
- $12,000
- Direct labor (1,200 units x $16) 19,200
- Variable manufacturing overhead (1,200 units x $9) 10,800
- Fixed manufacturing overhead 12,000
- Total $54,000
- Average cost per unit $45
Selling and administrative expenses are all fixed. Amherst just received a special order from a firm in Mexico to purchase 900 units at $50 each. The order will not affect the selling price to regular customers.
a. Prepare a differential analysis of the relevant costs and revenues associated with the decision to accept or reject the special order, assuming Amherst has excess capacity.
b. Determine the net advantage or disadvantage (profit increase or decrease) of accepting the order, assuming Amherst does not have excess capacity.