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Tullius Corporation received a request for a special order of 8,000 units of product C64 for...

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Tullius Corporation received a request for a special order of 8,000 units of product C64 for $50.00 each. The normal selling price of this product is $53.25 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product C64 is computed as follows:

-Direct materials $18.10

-Direct labor 7.40

-Variable manufacturing overhead 5.20

-Fixed manufacturing overhead 4.80

-Unit product cost $35.50

Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product C64 that would increase the variable costs by $5.00 per unit and that would require a one-time investment of $43,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

Required: How much is the "effect" (incremental net operating income) on the company's total net operating income through accepting the special order?

Relevant Costing

Relevant costing involves companies considering future costs that will impact their decisions making. An example of such a decision relates to special orders. Special order decisions involve the calculation of costs associated with once-off, short term decisions when deciding whether to supply goods or services to a customer. Relevant costs are future costs that differ between alternatives. Examples of relevant costs in special order decisions include the cost of direct materials and opportunity costs associated with accepting the special order. If costs do not differ between alternatives, they are considered irrelevant costs and will not be included in decision making. An example of irrelevant cost includes fixed cost which do not change regardless of whether a special order is accepted or not.

Answer and Explanation: 1

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Selling price per special order unit 50
less
Direct materials 18.10
Direct labor 7.40
Variable manufacturing overhead 5.20
Increase in...

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Relevant & Irrelevant Costs for Decision-Making

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Chapter 8 / Lesson 1
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In accounting, there are relevant and irrelevant costs. Relevant costs include differential, avoidable, and opportunity costs. Irrelevant costs include sunk and fixed overhead costs. In this lesson, we will learn about these and calculate them.


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