Juan Dela Cruz operates a small machine shop. He manufactures one standard product available from many other similar businesses and he also manufactures products to customer order.
Juan Dela Cruz operates a small machine shop. He manufactures one standard product available from many other similar businesses and he also manufactures products to customer order. His accountant prepared the annual income statement shown below:
|
|
Custom Sales |
Standard Sales |
Total |
|
Sales |
P1,000,000 |
P500,000 |
P1,500,000 |
|
Material |
P 200,000 |
P160,000 |
P 360,000 |
|
Labor |
400,000 |
180,000 |
580,000 |
|
|
126,000 |
72,000 |
198,000 |
|
Power |
14,000 |
8,000 |
22,000 |
|
Rent |
120,000 |
20,000 |
140,000 |
|
Heat and light |
12,000 |
2,000 |
14,000 |
|
Other |
8,000 |
18,000 |
26,000 |
|
Total |
P 880,000 |
P460,000 |
P1,340,000 |
|
Income |
P 120,000 |
P 40,000 |
P 160,000 |
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 space which has been leased for 10 years at P140,000 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 identified with the product line incurring them.
A valued custom parts customer has asked Mr. Dela Cruz to manufacture 5,000 special units for him. Mr. Dela Cruz is working at capacity and would have to give up some other business to take this business. He cannot renege on custom orders already agreed to but 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 P140 for each part. The material cost will be about P40 per unit and the labor will be P72 per unit. Mr. Dela Cruz will have to spend P40,000 for a special device which will be discarded when the job is done.
1. Refer to Dela Cruz Co. What is the relevant cost of the special order of 5,000 units?
2. Refer to Dela Cruz Co. What is the effect on the overall profit if the special order is accepted?
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