Question

21. A customer has requested that Bricks Company fill a special order for 3,000 units of the product N11 for $20.30 per unit. While the product needs to be modified slightly for the special order, the product N11's normal unit product cost is $18.50, as shown in the below table. Direct labor is a variable cost. The special order will have no effect on the company's total fixed manufacturing overhead costs. The customer wants some modifications to be made to the product N11, which will increase the variable costs by $2.50 per unit and will also require an investment of $8,000 in special molds that will have no salvage value. This special order will have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, what is the effect on the company's overall net operating income? *

Item                                                                                  Amount

Direct Materials                                                              $7.20 per unit

Direct Labor                                                                     $6.30 per unit

Variable Manufacturing Overhead                              $3.70 per unit

Fixed Manufacturing Overhead                                    $1.30 per unit

Unit Product Cost                                                            $18.50 per unit

The overall net operating income will decrease by $2,600.

The overall net operating income will decrease by $6,200.

The overall net operating income will increase by $1,800.

The overall net operating income will increase by $5,400.

None of the above

Answer 1

Answer is Option b. The overall net operating income will decrease by $6,200.

Computation of increase or decrease in net operating income if special order is accepted :

Increase/decrease in net operating income = Increase in revenue - Increase in expenses

= Increase in contribution margin - Increase in fixed cost

= $ 1,800 - $ 8,000

= ( $ 6,200 )

Thus, Decrease in net operating income by $ 6,200 if company accept the order

Therefore, Answer is Option b. The overall net operating income will decrease by $6,200.

Working note:

1. Calculation of increase in contribution margin is as follows:

Increase in contribution margin = Contribution margin per unit from special order * Number of units to be produce for special order

= $ 0.60 * 3,000 units

= $ 1,800

Contribution margin per unit from special order = order price per unit - Variable expenses per unit

= $ 20.30 - $ 19.70

= $ 0.60

Variable expenses per unit = Direct Material + Direct labor + Variable manufacturing overhead + Increase in variable cost due to accepted order

= $ 7.20 + $ 6.30 + $ 3.70 + $ 2.50

= $ 19.70

2. For production of order units, require an investment of $8,000 in special molds. Thus increase in Fixed cost is $ 8,000