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Fence Pro Company sells several types of fencing
Fence Pro Company sells several types of fencing. One type, premium fencing, regularly sells for $120 per foot. A customer wants to purchase 1,500 feet of premium fencing at $75 per foot to use as a charitable donation to organizations that build homes for the homeless. Fence Pro's costs per foot of premium fencing sold to regular customers are as follows: Direct $32 materials Direct labor $22 Variable $10 overhead Fixed $10 overhead Sales commissions $3 The customer would also like to customize the fencing. The cost of the customization is $5 per foot. and a special machine costing $12,000 would be required to perform the customization. After the order is complete the machine would be scrapped (i.e., the machine has no salvage value). Assume no sales commissions would be incurred for the special order and the company can provide the fencing for the special order without interfering with sales to regular customers. Fixed costs at Fence Pro are unavoidable. Should this special order be accepted and why? Yes, income will increase by $1,500 Yes, income will increase by $4,500 No, income will decrease by $1,500 No, income will decrease by $3,000 None of the above
Expert Solution
No, Income will decrease by $3,000
Explanation
Special Order
Number of units to be sold = 1,500 feet
Selling Price per foot = $75
Sales Revenue from special order = Selling Price per foot * Number of units to be sold
= $75 * 1,500
= $112,500
Cost to be taken into account for special order
Direct Material per foot = $32
Direct Labour per foot = $22
Variable Overhead per foot = $10
Customization Cost per foot = $5
Cost of Special Machine required for Customization = $12,000
Total Variable Cost per foot for special order = Direct Material per foot + Direct Labour per foot + Variable Overhead per foot + Customization cost per foot
= $32 + $22 + $10 + $5
= $69 per foot
Number of units = 1,500 feet
Total Variable Cost for Special Order = Total variable cost per foot for special order * number of units
= $69 * 1,500
= $103,500
Total Cost Of Special Order = Total Variable Cost for Special Order + Cost of Special machine required for customization of special order
= $103,500 + $12,000
= $115,500
Note: 1) Fixed Overhead Cost will not be taken into account for special order as fixed costs are unavoidable and will be incurred irrespective of whether we accept this special order or not.
2) Sales Commission won't be taken into account for special order as it is given in question that it will not be incurred for special order.
3) Cost of Special Machine will be taken into account for special order as it is required only for special order and will be scrapped after the special order.
So, if special order is accepted
Total Cost of Special Order = $115,500
Sales Revenue from Special Order = $112,500
Income (loss) from Special Order = Sales Revenue from special order - Total Cost of Special order
= $112,500 - $115,500
= - $3,000 (i.e. loss)
So, if Special Order is accepted income will decrease by $3,000.
Therefore, special order should not be accepted as existing income will decrease by $3,000 if special order is accepted.
So the correct answer is No, Income will decrease by $3,000
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