Question

A customer has requested that Inga Corporation fill a special order for 3,200 units of product K81 for $28 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $23.50:

Direct materials	$ 6.80
Direct labor	4.00
Variable manufacturing overhead	3.90
Fixed manufacturing overhead	8.80
Unit product cost	$23.50

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 modifications made to product K81 that would increase the variable costs by $2.40 per unit and that would require an investment of $12,000 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. If the special order is accepted, the company's overall net operating income would increase (decrease) by:

$22,880

$(11,700)

$12,200

$(3,000)

Answer 1

$22,880

Working:

a.

Per Unit

Direct Materials

a

$       6.80

Diret Labor

b

$       4.00

Variable Manufacturing overhead

c

$       3.90

Variable costs of normal unit

d=a+b+c

$    14.70

Increase in variable costs

e

$       2.40

Variable cost of special order unit

f=d+e

$    17.10

Fixed cost per unit

g

$       12,000

/

3200

=

$       3.75

Total costs

h=f+g

$    20.85

Selling price to be received

i

$    28.00

Profit

i-h

$       7.15

b.

Increase in total net operating income

=

Total Order units x Profit per unit

=

3200

x

$       7.15

=

$       22,880

This is special order which means in addition to normal working.So all costs that will be incurred due to acceptence of this order will only

be considerd while calculating total cost of special order unit. Fixed costs will not changed.So, fixed costs will be not considerd.

Only fixed costs in the form of investment in special molds is considered because it is incurred to meet the special order.