Accounting of Products

453 Words2 Pages
1. The relevant costs to this decision are the incremental costs associated with the decision. Thus, whatever cost and pricing structure Lewis has for other products is not relevant. Also irrelevant are fixed costs. This is because these costs will be incurred regardless of whether or not Lewis undertakes this offer or not. Relevant to this decision are the following: Revenue $245 Direct Material 105 Direct Labor 60 Variable Overhead 40 Contribution $40 The product makes a contribution of $40 to fixed costs. The variable overhead is included in the calculation because it is assumed that this represents true variable overhead and not simply an overhead allocation. For example, truly variable overhead could relate to additional utilities needed to run the factory that would not be used if the factory sat idle. Because the product has a positive contribution, it adds to the profitability of Lewis. As such, if Lewis has the capacity, it should accept this offer. 2. If the company only pays $225 per unit, the product still has a profitable contribution for Lewis: Revenue $225 Direct Material 105 Direct Labor 60 Variable Overhead 40 Contribution $20 The contribution is only $20 per unit, but this is $22,000 for the order. Again, if we assume that the order does not cannibalize existing sales or productive capacity, Lewis should accept the offer. 3. If I was the financial manager, I would accept this project. Any project that adds a positive contribution to
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