George Jackson operates a small machine shop. He manufactures one standard product available from many other similar businesses and he also manufactures custom products to customer order.
His accountant prepared the following annual income statement:
Custom Sales
Standard Sales
Total
Sales
$50,000
$25,000
$75,000
Material
10,000
8,000
18,000
Labour
20,000
9,000
29,000
Depreciation
6,300
3,600
9,900
Power
700
400
1,100
Rent
6,000
1,000
7,000
Heat and light
600
100
700
Other
400
900
1,300
44,000
23,000
67,000
$6,000
$2,000
$8,000
The depreciation charges are for machines used in the respective product lines. The power charge is apportioned on the estimate of power consumed. The rent is for the building space, which has been leased for 10 years at $7,000 per year. The rent, heat and light are apportioned to the product lines based on the amount of floor space occupied. All other costs are current fixed expenses identified with the product line incurring them.
A valued custom parts customer has asked Jackson to manufacture 5,000 special units for him.
Jackson is working at capacity and would have to give up some other business to take this order.
He cannot renege on 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 for each part. The material cost will be about $2 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?
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