Special order For The Ages Inc. produces solid-oak umbrella stands. Each stand is handmade and hand finished using the finest materials available. The firm has been operating at capacity (3,600 stands per year) for the past three years. Based on this capacity of operations, the firm's costs per stand are as follows: Direct material Direct labor $50 40 Variable overhead Fixed overhead Total 10 30 $130 All selling and administrative expenses incurred by the firm are fixed. The average selling price of stands is $230. Recently, a large retailer approached Bill Wood, the president of For the Ages, about supplying 5 special stands to give as gifts to CEOs of key suppliers. Wood estimates that the following per-unit costs would be incurred to make the 5 stands: Direct material Direct labor $250 350 Variable overhead 90 Total direct costs $690 To accept the special order, the firm would have to sacrifice production of 36 regular units. a. Identify the total relevant cost that Wood should consider in deciding whether to accept the special order. $ b. Assume the retailer offers to pay For The Ages a total of $6,840 for the 5 stands. How would accepting this offer affect For The Ages' pre-tax income? Note: Do not use a negative sign with your answer. Accepting the offer would result in an
Special order For The Ages Inc. produces solid-oak umbrella stands. Each stand is handmade and hand finished using the finest materials available. The firm has been operating at capacity (3,600 stands per year) for the past three years. Based on this capacity of operations, the firm's costs per stand are as follows: Direct material Direct labor $50 40 Variable overhead Fixed overhead Total 10 30 $130 All selling and administrative expenses incurred by the firm are fixed. The average selling price of stands is $230. Recently, a large retailer approached Bill Wood, the president of For the Ages, about supplying 5 special stands to give as gifts to CEOs of key suppliers. Wood estimates that the following per-unit costs would be incurred to make the 5 stands: Direct material Direct labor $250 350 Variable overhead 90 Total direct costs $690 To accept the special order, the firm would have to sacrifice production of 36 regular units. a. Identify the total relevant cost that Wood should consider in deciding whether to accept the special order. $ b. Assume the retailer offers to pay For The Ages a total of $6,840 for the 5 stands. How would accepting this offer affect For The Ages' pre-tax income? Note: Do not use a negative sign with your answer. Accepting the offer would result in an
Chapter1: Financial Statements And Business Decisions
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The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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Transcribed Image Text:Special order
For The Ages Inc. produces solid-oak umbrella stands. Each stand is handmade and hand finished using the finest materials available. The firm has been operating at capacity (3,600 stands
per year) for the past three years. Based on this capacity of operations, the firm's costs per stand are as follows:
Direct material
Direct labor
$50
40
10
Variable overhead
Fixed overhead
Total
30
$130
All selling and administrative expenses incurred by the firm are fixed. The average selling price of stands is $230. Recently, a large retailer approached Bill Wood, the president of For the
Ages, about supplying 5 special stands to give as gifts to CEOs of key suppliers. Wood estimates that the following per-unit costs would be incurred to make the 5 stands:
Direct material
Direct labor
$250
350
Variable overhead 90
Total direct costs $690
To accept the special order, the firm would have to sacrifice production of 36 regular units.
a. Identify the total relevant cost that Wood should consider in deciding whether to accept the special order. $
b. Assume the retailer offers to pay For The Ages a total of $6,840 for the 5 stands. How would accepting this offer affect For The Ages' pre-tax income?
Note: Do not use a negative sign with your answer.
Accepting the offer would result in an
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