Accept or Reject a Special Order

Selling price 90
Direct material 24
Direct labor 20
Fixed manufacturing overhead 16
Variable manufacturig overhead 8
Variable distribution costs 8
Fixed distribution costs 4
Annual sales in units 400,000
Offer price 75
Units offered 80,000
Additional distribution costs 4

Relevant Cost per unit P64.00

Net effect of special order P880,000
Decision (Accept or Reject) Accept

Make or Buy
Cost to make the parts
Materials 28
Labor 36
Variable manufacturing overhead 12
Fixed manufacturing overhead 24
Cost to buy the parts 96
Avoidable fixed cost 60%
Units needed 25,000

Cost to make Cost to buy Difference

Direct materials 28
Direct labor 36
Variable manufacturing overhead 12
Fixed manufacturing overhead 14.4
Cost to buy 96
Relevant cost per unit 90.4 96 5.6
x units 25,000 25,000 25,000
Total 2,260,000 2,400,000 140,000

Decision (Make or Buy) Make

Eliminate or Continue

Sales 800,000
Variable Costs
Direct Materials 260,000
Labor 200,000
Variable Overhead 130,000
Variable Selling Costs 120,000 710,000
Contribution Margin 90,000
Fixed Costs
Fixed Overhead (60% avoidable) 70,000
Fixed Selling Costs (50% avoidable) 60,000 130,000
Net Income (Loss) -40,000

Direct contribution margin 18,000

Decision (Continue or Eliminate) Continue