Question

Your Corporation has received a request for a special order of 9,500 units of product AB1 for $54.00 each. The normal selling price of this product is $60.99 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product AB1 is computed as follows:

Unit product costs, current
	Direct Materials			$    19.50
	Direct Labor			$ 8.10
	Variable MOH			$ 5.00
	Fixed MOH			$ 5.50
	Total unit product cost			$    38.10

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 AB1 that would increase the variable costs by $4.00 per unit and that would require a one-time investment of $40,000 in a special jig 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.

Directions:  Determine the effect on the company's total net operating income of accepting the special order. Show your work!

Answer 1

• All working forms part of the answer.
• Ample spare capacity is available.
• Requirement working

	Units	per unit	Amount
Sales revenue	9500	$                       54.00	$       5,13,000.00
(-) Variable costs:
Direct material	9500	$                       19.50	$       1,85,250.00
Direct labor	9500	$                         8.10	$           76,950.00
variable MOH	9500	$                         5.00	$           47,500.00
Increase in variable cost	9500	$                         4.00	$           38,000.00
Total variable cost	9500	$                       36.60	$       3,47,700.00
Contribution margin	9500	$                       17.40	$       1,65,300.00
(-) Additional Investment fixed cost			$           40,000.00
Net Income from Offer			$       1,25,300.00

• Hence, the effect on the company’s total net operating Income of accepting the special order will be that the total net operating income will increase by $125,300