Wear Company Is Operating at 70% of Its Manufacturing Capacity

question 14

Essay

Wear Company is operating at 70% of its manufacturing capacity of 78,000 product units per year. A customer has offered to buy an additional 18,000 units at $41 each and sell them outside the country so as not to compete with Wear Company. The following data are available: $\begin{array}{lrr}\text { Costs at } 70 \% \text { Capacity: }&\text { Per }&\text { Total }\\&\text { Unit }\\\text { Direct materials } & \$ 28.00 & \$ 1,528,800 \\\text { Direct labor } & 3.00 & 163,800 \\\text { Overhead (fixed and variable) } & 7.00 & \underline{382,200} \\\hline\text { Totals }&\$38.00&\$2,074,800\end{array}$
In producing 18,000 additional units fixed overhead costs would remain at their current level but incremental variable overhead costs of $1.28 per unit would be incurred. What is the effect on total income if Wear Company accepts this order?

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Definitions:

Compounded Monthly

Interest calculation method where interest is added to the principal every month, affecting subsequent interest calculations.

Ordinary Annuity

A series of equal payments made at fixed intervals for a specified period of time, with the payments typically occurring at the end of each period.

Compounded Monthly

Interest calculated on the principal and previously earned interest every month.

Future Value

Future value is the value of a current asset at a specified date in the future based on an assumed rate of growth over time.