Gallerani Corporation has received a request for a special order of 6,000 units of product A90 for $21.20 each. Product A90's unit product cost is $16.20, determined as follows: Direct materials $ 6.10 Direct labor 4.20 Variable manufacturing overhead 2.30 Fixed manufacturing overhead 3.60 Unit product cost $ 16.20 Assume that direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product A90 that would increase the variable costs by $4.20 per unit and that would require an investment of $21,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Please note that fixed costs will not be included in the computation because they have been incurred. It is also within the capacity of the company to produce additional units hence decision will be on variable cost of ($4.20) per unit and additional mould cost of ($21,000).

Considering that absorption costing is used, normal fixed cost would be included hence total cost of 6,000 units would be = Total variable cost + Fixed cost

Where

Total variable cost = $12.6 + $4.20

= $16.8

Fixed cost = $21,000

Total cost = [$16.8 × 6,000] + [$21,000]

= $100,800 + $21,000

= $121,800

Revenue from 6,000 units would be

= $21.20 × 6,000

= $127,200

Net result = $127,200 - $121,800

= $5,400

The project should be accepted since there is a positive result with a financial leverage of $5,400