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question l a lo operates a small machine shop he manufactures one standard product w 4294084

Question

L.A. Lo operates a small machine shop. He manufactures one standard product, which is available from many other similar businesses in addition to custom-made products. His accountant prepared the following annual income statement:

 

Custom Sales

Standard Sales

Total

Sales revenue

$ 50,000

$25,000

$75,000

Less: Costs

 

 

 

Materials

$ 10,000

$ 8,000

$ 18,000

Labor

20,000

9,000

29,000

Depreciation

6,300

3,600

9,900

Power

700

400

1,100

Rent

6,000

1,000

7,000

Heat and light

600

100

700

Other

400

900

1,300

Total costs

$ 44,000

$ 23,000

$ 67,000

Operating profit

$ 6,000

$ 2,000

$ 8,000

The depreciation charges are for machines (based on time) used in the respective product lines. The power charge is apportioned based on the estimate of power consumed. The rent is for the building space, which has been leased for 10 years at $7,000 per year. The rent, heat, and electricity are apportioned to the product lines based on the amount of floor space occupied. All other costs are current expenses identified with the product line causing them.

A valued custom parts customer has asked L.A. to manufacture 10,000 special units. L.A. is working at capacity and would have to give up some other business to take this business. He can’t renege on custom orders already agreed to, but he can reduce the output of his standard product by about one-half for one year while producing the custom part. The customer is willing to pay $7 for each unit. Materials will cost about $2 per unit and the labor $3.60 per unit. L.A. will have to spend $2,000 for a special device, which will be discarded when the job is done.

Required:

Should L.A. take the order? Show the calculation and explain your answer.

 

 

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