Problem - Special order
Wisconsin Metal Co. produces 12.5-gauge barbed wire that is retailed through farm supply companies. Presently, the company has the capacity to produce 100,000 tons of wire per year. It is operating at 80 percent of annual capacity and, at this level of operations, the cost per ton of wire is as follows:
Direct material $520.00
Direct labor 40
Variable overhead 50
Fixed overhead 190
Total $800.00
The average sales price for the output produced by the firm is $900 per ton. The State of Texas has approached the firm to supply 200 tons of wire for the state's prisons for $620 per ton. No production modifications would be necessary to fulfill the order from the State of Texas.
a. What costs are relevant to the decision to accept this special order?
b. What would be the dollar effect on pre-tax income if this order were accepted?