Vance Company Manufactures a Product That Has the Following Unit

Essay

Vance Company manufactures a product that has the following unit costs: direct materials, £15; direct labour, £12; variable overhead, £8; and fixed overhead, £12. Fixed selling costs are £1,500,000 per year. Variable selling costs of £4 per unit cover the transportation cost. Although production capacity is 800,000 units per year, the company expects to produce only 650,000 units next year. The product normally sells for £70 each. A customer has offered to buy 50,000 units for £45 each. The customer will pay the transportation charge on the units purchased.
Required:
a.What is the incremental cost to Vance Company for the special order?
b.What is the effect on Vance's income if the special order is accepted?