Vermillion Metal Works received an offer from a big-box retail company to purchase 3,060 metal outdoor tables for $220 each

Accounting Dec 22, 2020

Vermillion Metal Works received an offer from a big-box retail company to purchase 3,060 metal outdoor tables for $220 each. Vermillion Metal Works accountants determine that the following costs apply to the tables:

Direct material$133

Direct labor $51

Manufacturing overhead $ 71

Total$255

Of the $71 of overhead, $14 is variable and $57 relates to fixed costs. The $57 of fixed overhead is allocated as $1.12 per direct labor dollar.

Question:

What will be the real effect on profit if the order is accepted?

Increase or decrease and by how much__________?

Expert Solution

Computation of the real effect on profit if the order is accepted:-

Increase or decrease in profit = (Special order price - Relevant Costs) * Number of special order units

= ($220 - ($133 + $51 + $14)) * 3,060

= ($220 - $198) * 3,060

= $22 * 3,060

= $67,320

Hence, the profit will increase by $67,320

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