4). Grill Time sells its barbecue sets for $170 each. Suppose the company incurs the following...

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4). Grill Time sells its barbecue sets for $170 each. Supposethe company incurs the following average cost per barbecue set:
Direct materials $52
Direct labor 28
Variable manufacturing overhead 11
Variable selling expenses 5
Fixed manufacturing overhead* 24 Total cost $120
* $ 1,800,000 / 75,000 units
Grill Time has enough idle capacity to accept a one-time-onlyspecial order from Backyard Living, Inc. for 2,000 barbecue sets ata sales price of $130 per set. Grill Time will not incur $2 ofvariable selling expenses for this order.
How would accepting the order affect Grill Time's operatingincome?

Answer & Explanation Solved by verified expert

3.8 Ratings (684 Votes)

Variable expense is an expense varies with level of units sold/produced thus it is relevant while making any decision since it results in incremental cost .

Variable cost per unit incurred in case special offer is accepted :52+28+11+(5-2)

= 52+28+11+3

= 94

Fixed cost remain constant irrespective of level of units produced /sold thus it is irrelevant while making any decision (unless any incremental cost is incurred or it is avoidable]

Incremental revenue from special offer (2000*130)	260000
less:variable cost [94*2000]	(188000)


Incremental profit /(loss)	72000

Operating income will increase by 72000 from acceptance of offer.

**since there is enough idle capacity available ,there is no loss of regular sales.

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