Question

Jedi Enterprises makes small toys for the North American market. A customer from Europe has approached Jedi with an offer to purchase 10,000 units of their Millennium Falcon toy at a price of $7 each. Each year, they can make 75,000 units of their Millennium Falcon toy but they’re planning on only making 60,000 units this year. The normal sales price is $12 per unit.

Unit cost information for the Millennium Falcon is as follows:

Direct materials	$1.50
Direct labour	2.00
Variable factory overhead	1.00
Fixed factory overhead	3.25
Fixed selling & admin.	0.25
Total	$8.00

The European company would like their logo affixed to each toy using a label. Each label will cost Jedi Enterprises $0.50 each. The extra cost to ship the Millennium Falcon to Europe is $0.75 per toy. Total fixed costs will not change if they accept this special order.

Required:

How much will operating income increase or decrease if the special order is accepted?

Answer 1

The Fixed Cost will be based on 75,000 units.

Particulars	Amount	Amount
Selling Price per unit		$            12.00
Less: Variable Cost per unit
Direct Materials	$               1.50
Direct Labour	$               2.00
Variable Factory Overhead	$               1.00
Total Variable Cost per unit	$               4.50	$               4.50
Contribution per unit (Selling Price - Total variable Cost)		$               7.50
Fixed Cost
Fixed Factory Overhead	$ 243,750.00
Fixed Selling and admin.	$    18,750.00
Total Fixed Cost	$ 262,500.00	$ 262,500.00
Break Even Point in units (Total Fixed Cost / Contribution per unit)		35000.00

Calculation for special order
Particulars	Amount	Amount
Total Variable Cost per unit		$               4.50
Additional Variable Cost
Label Cost	$               0.50
Shipping Cost	$               0.75
Total Additional Variable Cost per unit	$               1.25	$               1.25
Total Varibale Cost for special order per unit		$               5.75
Selling Price per unit		$               7.00
Contribution per unit (Selling Price - Total variable Cost)		$               1.25
Total Contribution ( 1.25*10,000)		$    12,500.00

So by accepting the special order there will be increase in the revenue or operating income by $12,500.00.