Question

Tullius Corporation has received a request for a special order of 8,800 units of product C64 for $45.70 each. The normal selling price of this product is $50.80 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product C64 is computed as follows:

Direct materials	$16.50
Direct labor	5.80
Variable manufacturing overhead	3.00
Fixed manufacturing overhead	5.90
Unit product cost	$31.20

Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product C64 that would increase the variable costs by $5.40 per unit and that would require a one-time investment of $45,200 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

Required:

Determine the effect on the company's the incremental net operating income of accepting the special order.

Answer 1

• All working forms part of the answer
• Working

	Additional Sale from Offer
	Units	per unit	Amount
Sales revenue	8800	$                             45.70	$        4,02,160.00
Direct materials	8800	$                             16.50	$        1,45,200.00
Direct Labor	8800	$                               5.80	$            51,040.00
Variable manufacturing overhead	8800	$                               3.00	$            26,400.00
Additional variable cost	8800	$                               5.40	$            47,520.00
Total Variable cost	8800	$                             30.70	$        2,70,160.00
Contribution margin	800	$                             15.00	$       1,32,000.00
Fixed Cost of Investments			$            45,200.00
Additional Net Income from offer acceptance			$            86,800.00

• The effect on the company's the incremental net operating income of accepting the special order = Increase in Net Income by $ 86,800