Problem:
1. The Ellis Machine Tool Company is considering production for a special order for 10,000pieces at $0.65 apiece, which is below the regular price. The current operating level, which is below full capacity of 70,000 pieces, shows the operating results as contained in the following report.
The regular production during the year was 50,000 pieces.
|
Sales @ $1
|
|
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$50,000
|
|
Direct materials
|
|
$20,000
|
|
|
Direct labor
|
|
10,000
|
|
|
Factory overhead:
|
|
|
|
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Supervision
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$3,500
|
|
|
|
Depreciation
|
1,500
|
|
|
|
Insurance
|
100
|
|
|
|
Rental
|
400
|
5,500
|
35,500
|
| |
|
|
$14,500
|
Factory overhead costs will continue regardless of the decision.
(a) What are the incremental costs, if any, in this decision problem? Prepare a schedule showing the incremental cost. (b) Which costs, if any, represent sunk costs? (c) What would be the opportunity cost, if any, associated with the special order?