MA71 Problem: Relevant Costing – Special Orders - George Jackson

MA71 Problem: Relevant Costing – Special Orders - George Jackson

George Jackson operates a small machine shop. He manufactures one standard product available frommany other similar businesses, and he also manufactures products to customer order. His accountant prepared the following annual income statement:

Custom Standard Sales Sales Total 

Sales $50,000 $25,000 $75,000Material 10,000 8,000 18,000Labour 20,000 9,000 29,000Depreciation 6,300 3,600 9,900Power 700 400 1,100Rent 6,000 1,000 7,000Heat and light 600 100 700Other 400 900 1,30044,00023,00067,000$ 6,000 $ 2,000$ 8,000The depreciation charges are for machines used in the respective product lines. The power charge isapportioned on the estimate of power consumed. The rent is for the building space, which has been leasedfor 10 years at $7,000 per year. The rent and heat and light are apportioned to the product lines based onthe amount of floor space occupied. All other costs are current fixed expenses identified with the productline incurring them.A valued custom parts customer has asked Jackson to manufacture 5,000 special units for him. Jackson isworking at capacity and would have to give up some other business to take this order. He cannot renegeon custom orders already agreed to, but he could reduce the output of his standard product by about one-half for one year while producing the specially requested custom part. The customer is willing to pay$7.00 for each part. The material cost will be about $2.00 per unit, and the labour 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.

 Required -

What is the net gain or loss from the special order?