Wiacek Corporation has received a request for a special order of 5,200 units of

Question

Wiacek Corporation has received a request for a special order of 5,200 units of product F65 for $28.20 each. Product F65's unit product cost is $27.75, determined as follows: Direct materials $3.20 Direct labor 8.50 Variable manufacturing overhead 7.60 Fixed manufacturing overhead 8.45 Unit product cost $27.75 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 F65 that would increase the variable costs by $4.50 per unit and that would require an investment of $16,000 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: $(37,060) $6,880 $2,340 $(91,260)

Explanation / Answer

Existing fixed cost is irrelevant for decision making.

Sales in units                   5,200

Selling price                                         $ 3.20

Direct material                    $ 3.20

Direct labor                                           $ 8.50

Variable manufacturing overhead      $ 4.50

Total variable cost $ 23.80

Contribution per unit = Selling price – variable cost =28.20 – 23.80 =4.4

Total contribution margin =

Contribution per unit x no. of units = 4.4 x 5,200 = 22880

(-) Special investment cost                                 16,000

         Profit                                                       $ 6,880

If the special order is accepted, the company's overall net operating income would increase by: $6,880

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