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 ( 3,200 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$50 Direct labor40 Variable overhead10 Fixed overhead30 Total$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$250 Direct labor350 Variable overhead90 Total direct costs$690
To accept the special order, the firm would have to sacrifice production of 32 regular units.
a. Identify the total relevant cost that Wood should consider in deciding whether to accept the special order. $Answer 1
b.Assume the retailer offers to pay For The Ages a total of $6,080 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 anAnswer 2 incremental gain ofIncremental loss of
$Answer 3