Question

Wehrs Corporation has received a request for a special order of 8,900 units of product K19 for $45.80 each. The normal selling price of this product is $50.90 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product K19 is computed as follows:

Direct materials	$	16.60
Direct labor		5.90
Variable manufacturing overhead		3.10
Fixed manufacturing overhead		6.00
Unit product cost	$	31.60

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 K19 that would increase the variable costs by $5.50 per unit and that would require a one-time investment of $45,300 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 total net operating income of accepting the special order.

Answer 1

Effect on income = Increase in income = $85,530

Working

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (8900 x 45.8)	$ 407,620
Less: Total Additional cost due to acceptance of offer	$ 322,090
Financial Advantage	$ 85,530

.

Working

Calculation of Additional Cost of Order
	Per Unit	Total
Direct material	$                    16.60	$ 147,740
Direct labor	$                      5.90	$ 52,510
Variable manufacturing overheads	$                      3.10	$ 27,590
Additional variable cost	$                      5.50	$ 48,950
Additional fixed cost		$ 45,300
Total Additional cost due to acceptance of order	$                    31.10	$ 322,090