A customer has asked Twiner Corporation to supply 5,000 units of product DOS, wi

Question

A customer has asked Twiner Corporation to supply 5,000 units of product DOS, with some modifications, for $40.20 each. The normal selling price of this product is $52.80 each. The normal unit product cost of product DOS is computed as follows: 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 DO5 that would increase the variable costs by $3.50 per unit and that would require a one time investment of $23,000 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. Determine the effect on the company?s total net operating income of accepting the special order.

Explanation / Answer

Calculating Effect on Company’s total net operating income;

Total costs for 5000 units is calculated as follow;

(Direct materials $63500 + Direct labour $30500 + Variable and Manufacturing overheads (12.2 x 5000) $61000 + One time investment $23000 )

Thus total cost of this order to company = $178000

Sales Prices of this order ($40.2 x 5000) = $201000

Net effect on Company’s total net operating income = ($201000 – $178000) = $23000

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