Sandy Corporation produces a product that is sold for P80 each. It uses an absorption costing system. Plant capacity is 700,000 units per year, but normal volume is only 500,000 units. Costs per unit at normal volume are as follows: Materials P20 Labor 10 Factory Overhead 24 Selling and administrative 15 Total costs P69
Annual fixed costs are: Factory overhead P 5,000,000 Selling and administrative 3,000,000
Total Costs P 8,000,000

During the month, a customer has offered to buy 80,000 units at P60 per unit. Per the customer’s specifications, the products will not be packed individually. Instead, they will be packaged in large cartons, to be picked up by the customer using its own truck. Thus, variable selling and administrative costs will be reduced by 1/3. No additional fixed costs will be incurred for this order.

Assuming that the regular and special markets can be distinguished, the company should a. reject the order because total profit will decrease by P1,600,000 b. accept the order because, although it will result into a loss, it will enable the company to use its idle capacity c. reject the order because total profit will decrease by P720,000 d. accept the order because it will contribute additional profit of P800,000

Answer: D

Special price P 60.00
Less: Relevant costs: Materials P20.00 Labor 10.00 Variable FOH (P24-[5,000,000 / 500,000]) 14.00 Variable selling and administrative (P15-[P3,000,000 / 500,000]) x 2/3 6.00 50.00
Unit Contribution Margin P 10.00
X Units ordered 80,000
Incremental profit if order is accepted P