A customer has requested that a company fill a special Order for 3,400 units of

Question

A customer has requested that a company fill a special Order for 3,400 units of a product for $29 a unit The normal unit product cost for this product is $24.30 as follows: Direct materials $6.40 Direct labor 5.20 Vanable manufacturing overhead 3.90 Fixed manufacturing overhead 8.80 Total unit product cost $24.30 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 the product that would increase the variable manufacturing costs by $1.60 per unit and would require an investment of $11,400 In special equipment that would have no salvage value This special order would have no effect on the company's other sales The company that the capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by: $29,060 $(28,040) $15,980 $(860)

Explanation / Answer

Answer:

Sales revenue from sale under special order      = $ 98,600 ($ 29 x 3,400)

Less: Direct Material Cost                                     = $ 21,760 ($ 6.40 x 3,400)

Less: Direct Labor Cost                                         = $ 17,680 ($ 5.20 x 3,400)

Less: Variable Manufacturing Overhead               = $ 18,700 {($ 3.90 + $ 1.60) x 3,400}

Less: Cost of special equipment for modification = $ 11,400

Net Income / (Loss) from special order                  = $ 29,060

The correct answer is option a) $ 29,060.

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