Digital Devices, Inc.has received a special order to manufacture 10,000 CD ROM drives for an Italian computer manufacturer.Digital determines that the order will not affect its current domestic sales of CD ROM drives and because of the special nature of the order no sales commission would be paid.However, to process the order for export, an additional handling cost of $10 per unit is estimated.The order indicates that the price of the drives cannot exceed $200.
The company has the capacity to produce 100,000 units annually but is currently operating at 75% of available capacity.Unit selling price and costs, based on estimated actual capacity being utilized, are as follows:
$\begin{array}{lrr}
\text { Selling price } &\$260\
\text { Expenses: } &\
\text {Direct materials } &\$80\
\text {Direct labor } &40\
\text { Variable manufacturing overhead} &50\
\text { Fixed manufacturing overhead } &30\
\text {Sales commission } &26\
\text { Fixed administrative expenses } &\underline{8}\
\text {Total } &\underline{\$234}\
\end{array}$
(a.)Prepare a relevant cost analysis showing the effect on profit if the company accepts the special order.
(b.)How would your analysis change if Digital Devices, Inc., was producing and selling 100,000 units annually?

Question

Digital Devices, Inc.has received a special order to manufacture 10,000 CD ROM drives for an Italian computer manufacturer.Digital determines that the order will not affect its current domestic sales of CD ROM drives and because of the special nature of the order no sales commission would be paid.However, to process the order for export, an additional handling cost of $10 per unit is estimated.The order indicates that the price of the drives cannot exceed $200.
The company has the capacity to produce 100,000 units annually but is currently operating at 75% of available capacity.Unit selling price and costs, based on estimated actual capacity being utilized, are as follows:
 $\begin{array}{lrr}
  \text { Selling price } &\$260\
 \text {  Expenses: } &\
 \text {Direct materials  } &\$80\
 \text {Direct labor  } &40\
 \text {  Variable manufacturing overhead} &50\
 \text { Fixed manufacturing overhead } &30\
 \text {Sales commission  } &26\
 \text { Fixed administrative expenses } &\underline{8}\
 \text {Total  } &\underline{\$234}\
\end{array}$
 (a.)Prepare a relevant cost analysis showing the effect on profit if the company accepts the special order.
(b.)How would your analysis change if Digital Devices, Inc., was producing and selling 100,000 units annually?

Quizplus · Accepted Answer

The Answer of Digital Devices, Inc.has received a special order to manufacture 10,000 CD ROM drives for an Italian computer manufacturer.Digital determines that the order will not affect its current domestic sales of CD ROM drives and because of the special nature of the order no sales commission would be paid.However, to process the order for export, an additional handling cost of $10 per unit is estimated.The order indicates that the price of the drives cannot exceed $200.
The company has the capacity to produce 100,000 units annually but is currently operating at 75% of available capacity.Unit selling price and costs, based on estimated actual capacity being utilized, are as follows:
 $\begin{array}{lrr}
  \text { Selling price } &\$260\
 \text {  Expenses: } &\
 \text {Direct materials  } &\$80\
 \text {Direct labor  } &40\
 \text {  Variable manufacturing overhead} &50\
 \text { Fixed manufacturing overhead } &30\
 \text {Sales commission  } &26\
 \text { Fixed administrative expenses } &\underline{8}\
 \text {Total  } &\underline{\$234}\
\end{array}$
 (a.)Prepare a relevant cost analysis showing the effect on profit if the company accepts the special order.
(b.)How would your analysis change if Digital Devices, Inc., was producing and selling 100,000 units annually?

Digital Devices, Inc (A)Prepare a Relevant Cost Analysis Showing the Effect on Profit