George Jackson operates a small machine shop. He manufactures one standard product available from many other similar businesses, and he also manufactures custom-ordered products. His accountant prepared the following annual income statement.

The depreciation charges are for machines used in the respective product lines. The power charge is apportioned on an 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 and the heat and lights 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 Jackson if he would manufacture 5,000 special units for her. Jackson is working at capacity and would have to give up some other business to take this order. He cannot renege on custom orders already agreed to, but he would have to reduce the output of his standard product by about one-half for a year while producing the specially requested customer part. The customer is willing to pay $7.00 for each part. The material cost will be about $2.00 per unit and the labor will be $3.60 per unit. Jackson will have to spend $2,000 for a special device that will be discarded when the job is done.

A. For the 5,000-unit custom order:
1. Calculate the incremental cost of the order
2. Calculate the full cost of the order (incremental plus allocated fixed costs such as depreciation, rent, etc.)
3. Calculate the opportunity cost of taking the order
B. Evaluate the relevant quantitative and qualitative information (including risks), weigh important factors, and recommend whether Jackson should take theorder.

  • CreatedJanuary 26, 2015
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