Horton Corporation Makes a Range of Products Management Is Considering a Special Order for 700 Units of Overhead

question 102

Essay

Horton Corporation makes a range of products. The company's predetermined overhead rate is $16 per direct labor-hour, which was calculated using the following budgeted data:
$\begin{array}{llr} \text { Variable manufacturing overhead } &\$75,000\\ \text { Fixed manufacturing overhead } &\$325,000\\ \text { Direct labor-hour's } &25,000\end{array}$

Management is considering a special order for 700 units of product 48 at $64 each. The normal selling price of product 48 is $75 and the unit product cost is determined as follows:
$$\begin{array} { l r } \text { Direct materials } & \$ 37.00 \\\text { Direct labor } & 18.00 \\\text { Marufacturing overhead applied } & 16.00 \\\text { Unit product cost } & \$ 71.00\end{array}$$
If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order.
Required:
If the special order were accepted, what would be the impact on the company's overall profit? (CIMA adapted)

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Definitions:

Cash Basis

A financial recording strategy that logs earnings and expenditures upon the actual receipt or payment of money, as opposed to when they are earned or incurred.

Direct Method

A way of preparing a cash flow statement where cash receipts and payments are reported directly.

Operating Activities

Transactions and other events related to the core business operations, affecting the operational cash flows of a company.

Selling and Administrative Expense

A category of expenses including overheads related to the general operation of a company, such as executive salaries, marketing, office supplies, and utilities.