The Reno Company manufactures part no. 498 for use in its production cycle. The cost per unit for 20,000 units of part no. 498 is as follows: Direct materials $6 Direct labor Variable overhead 30 12 Fixed overhead applied 16 $64 The Tray Company has offered to sell 20,000 units of part no. 498 to Reno for $60 per unit. Reno will make the decision to buy the part from Tray if there is a savings of $25,000 for Reno. If Reno accepts Tray's offer, $9 per unit of the fixed overhead applied would be totally eliminated. Furthermore, Reno has determined that the released facilities could be used to save relevant costs in the manufacture of part no. 575. In order to have a savings of $25,000, the amount of relevant costs that would be saved by using the released facilities in the manufacture of part no. 575 would have to be: (a) $80,000 (b) $85,000 (c) $125,000 (d) $140,000 Harrison Ford Company has been approached by a new customer with an offer to purchase 10,000 units of its model U4 at a price of $3.90 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Harrison normally produces 75,000 units of 14 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is 412 per unit. Unit cost information for the normal level activity is as follows: Direct materials Direct labor $1.75 2.50 Variable overhead 1.50 Fixed overhead Total 3.25 9.00 a) Should the company accept or reject the special order? b) By how much will operating income increase or decrease if the order is accepted?
The Reno Company manufactures part no. 498 for use in its production cycle. The cost per unit for 20,000 units of part no. 498 is as follows: Direct materials $6 Direct labor Variable overhead 30 12 Fixed overhead applied 16 $64 The Tray Company has offered to sell 20,000 units of part no. 498 to Reno for $60 per unit. Reno will make the decision to buy the part from Tray if there is a savings of $25,000 for Reno. If Reno accepts Tray's offer, $9 per unit of the fixed overhead applied would be totally eliminated. Furthermore, Reno has determined that the released facilities could be used to save relevant costs in the manufacture of part no. 575. In order to have a savings of $25,000, the amount of relevant costs that would be saved by using the released facilities in the manufacture of part no. 575 would have to be: (a) $80,000 (b) $85,000 (c) $125,000 (d) $140,000 Harrison Ford Company has been approached by a new customer with an offer to purchase 10,000 units of its model U4 at a price of $3.90 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Harrison normally produces 75,000 units of 14 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is 412 per unit. Unit cost information for the normal level activity is as follows: Direct materials Direct labor $1.75 2.50 Variable overhead 1.50 Fixed overhead Total 3.25 9.00 a) Should the company accept or reject the special order? b) By how much will operating income increase or decrease if the order is accepted?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The Reno Company manufactures part no. 498 for use in its production cycle. The
cost per unit for 20,000 units of part no. 498 is as follows:
Direct materials
$6
Direct labor
Variable overhead
30
12
Fixed overhead applied
16
$64
The Tray Company has offered to sell 20,000 units of part no. 498 to Reno for $60
per unit. Reno will make the decision to buy the part from Tray if there is a
savings of $25,000 for Reno. If Reno accepts Tray's offer, $9 per unit of the fixed
overhead applied would be totally eliminated. Furthermore, Reno has determined
that the released facilities could be used to save relevant costs in the manufacture
of part no. 575. In order to have a savings of $25,000, the amount of relevant
costs that would be saved by using the released facilities in the manufacture of
part no. 575 would have to be:
(a) $80,000
(b) $85,000
(c) $125,000
(d) $140,000
Harrison Ford Company has been approached by a new customer with an
offer to purchase 10,000 units of its model U4 at a price of $3.90 each. The
new customer is geographically separated from the company's other
customers, and existing sales would not be affected. Harrison normally
produces 75,000 units of 14 per year but only plans to produce and sell
60,000 in the coming year. The normal sales price is 412 per unit. Unit cost
information for the normal level activity is as follows:
Direct materials
Direct labor
$1.75
2.50
Variable overhead 1.50
Fixed overhead
Total
3.25
9.00
a) Should the company accept or reject the special order?
b) By how much will operating income increase or decrease if the order is
accepted?
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