John Bourcier operates a small machine shop. He manufactures one standard product that is also available from many other similar businesses, and he also manufactures deluxe products to order. His accountant prepared the following annual income statement:

The depreciation charges are for machines used in the product lines. The power charge is apportioned based on an estimate of the power consumed by each line. 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 light costs are apportioned to the product lines based on the amount of floor space occupied by each line. All other costs are current expenses that are identified with the product line causing them.
A valued customer has asked Mr. Bourcier if he would manufacture 5,000 of the deluxe products for him. Mr. Bourcier is working at capacity and would have to give up some other business in order to take this order. He cannot cancel deluxe orders he has already agreed to, so he would have to reduce the output of his standard product by about one half for a year while producing the requested deluxe product. The customer is willing to pay $7.00 for each unit. The material cost will be about $2.00 per unit and the labour will be $3.60 per unit. Mr. Bourcier will have to spend $2,000 for a special device that will be discarded when the job is done.
Instructions
(a) Calculate the incremental cost of the order.
(b) Calculate the full cost of the order.
(c) Calculate the opportunity cost of taking the order.
(d) Determine the sunk costs related to the order.
(e) Should Mr.Bourcier accept the order? Explain your answer.

Transcribed Image Text:

Deluxe Sales Standard Sales 5 Sales Costs Material 2 2 Depreciation Power Heat and light 2 2 costs 0 Net income 8,000