Your Company produces a single product. The cost of producing and selling a sing

Question

Your Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:

Direct materials .................................$53.60

Direct labor ..........................................$5.30

Variable manufacturing overhead .......$1.40

Fixed manufacturing overhead...........$13.20

Variable selling and administrative expense.... $1.60

Fixed selling and administrative expense..........$9.10

The normal selling price of the product is $91.60 per unit.
An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.00 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $81.90 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

Explanation / Answer

Relevant cost of manufacturing for one unit of special order :

Relevant cost of manufacturing = Direct materials + Direct labor + Variable manufacturing overhead + (Variable selling and administrative expense -1)

Relevant cost of manufacturing = 53.60+5.30 + 1.40 + (1.60-1)

Relevant cost of manufacturing = $ 60.90

Increase the company's net operating income for the month = (Sale Price of special order - Relevant cost of manufacturing)*No of unit

Increase the company's net operating income for the month = (81.90-60.90)*3000

Increase the company's net operating income for the month = $ 63000

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