The Melville Company produces a single product called a Pong. Melville has the c
ID: 2486938 • Letter: T
Question
The Melville Company produces a single product called a Pong. Melville has the capacity to produce 60,000 Pongs each year. The per unit cost to produce and sell one Pong are as follows:
Direct material $15
Direct labor 12
Variable manufacturing overhead 8
Fixed manufacturing overhead 9
Variable selling expense 8
Fixed selling expense 3
The regular selling price for one Pong is $80. A special order has been received by Melville from Mowen Company to purchase 6,000 Pongs next year. If this special order is accepted, the variable selling expense for this special order will be 25% of the regular variable selling expense. However, Melville will have to purchase a specialized machine to engrave the Mowen name on each Pong in the special order. This machine will cost $9,000 and it will have no use after the special order is filled. The total fixed manufacturing overhead and selling expenses would be unaffected by this special order.
Assume Melville anticipates selling only 50,000 units of Pong to regular customers next year. If Mowen Company offers to buy the special order units at $65 per unit, the effect of accepting the special order on Melville’s income for next year should be a
A. $60,000 increase
B. $90,000 decrease
C. $159,000 increase
D. $36,000 increase
I know the answer is C. How do you get to the answer?
Explanation / Answer
Particulars Amount Units of special order 6000 Selling Price of special order 65 Less: Direct material 15 Less: Direct Labor 12 Less: Variable manufacturing overhead 8 Less; Variable selling expenses 2 Profit per unit 28 Total Profit 168000 Less; Cost of equipment 9000 Increase in profit 159000
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