George Jackson operates a small machine shop. He manufactures one standard product which is available from many other similar businesses and also manufactures custom-made products. His accountant prepared the annual income statement shown below.
|
Custom
|
Standard
|
|
|
Sales
|
Sales
|
Total
|
|
Sales
|
$50,000
|
$75,000
|
$75,000
|
|
Material
|
$10,000
|
$ 8,000
|
$18,000
|
|
Labor
|
20,000
|
9,000
|
29,000
|
|
Depreciation
|
6,300
|
3,600
|
9,900
|
|
Power
|
700
|
400
|
1,100
|
|
Rent
|
6,000
|
1,000
|
7,000
|
|
Heat and light
|
600
|
100
|
100
|
|
Other
|
400
|
900
|
1,300
|
|
$44,000
|
$23,000
|
$67.000
|
|
$ 6.000
|
$ 2,000
|
$ 8,000
|
The depreciation charges are for machines used in the respective product lines. The power charge is apportioned on the estimate of power consumed. The rent is for the building pace, which has been leased for 10 years at $7,000 per year. The rent and heat and light are apportioned to the product lines based on amount of floor space occupied. All other costs are current expenses and are identified with the product line causing them.
A valued custom-parts customer has asked Mr. Jackson if he would manufacture 5,000 special units for him. Mr. Jackson is working at capacity and would have to give up some other business in order to take this special order. Though he cannot renege on custom orders already agreed to, he could reduce the output of his standard product by about one-half for one year while producing the specially requested custom part. The customer is willing to pay $7 for each part. The material cost will be about $2 per unit and the labor will be $3.60 per unit. Mr. Jackson will have to spend $2,000 for a special device which will be discarded when the job is done.
1. Calculate and present the following costs related to the 5,000-unit custom order:
(a) The incremental cost of the order
(b) The full cost of the order
(c) The opportunity costs of accepting the order
(d) The sunk costs related to the order
2. Should Mr. Jackson accept the special order? Explain your answer. (CMA, adapted)