13. The Varone Company makes a single product called a Hom. The company has the
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Question
13.
The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are:
The regular selling price for one Hom is $80. A special order has been received at Varone from the Fairview Company to purchase 6,700 Homs next year at 20% off the regular selling price. If this special order were accepted, the variable selling expense would be reduced by 30%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $11,200 and it would have no use after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labor is a variable cost.
If Varone can expect to sell 30,000 Homs next year through regular channels and the special order is accepted at 20% off the regular selling price, the effect on net operating income next year due to accepting this order would be a:
$67,000 increase
$22,800 decrease
$51,200 increase
$55,800 increase
The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are:
Explanation / Answer
Ans) Selling price - Direct materials - Direct labor - Variable manufacturing overhead - Variable selling expense = Unit contribution margin on normal sales
$80 - 24 - 14 -9 - 10 = $23
Capacity 40,000
Special order 6,700
Capacity available for normal sales 33,300
Demand for normal sales 30,000
Displaced normal sales 3,300
3,300 x $23 =-$75,900 lost contribution margin
Incremental revenue (6,700 x $64*) $428,800
Less incremental costs:
Direct materials (6,700 x $24) $160,800
Direct labor (6,700 x $ 14) 93,800
Variable manufacturing overhead (6,700 x $ 9) 60,300
Variable selling expense (6,700 x $7**) 46,900
Special machine 11,200
Total increment cost $375,700
Incremental net operating income 53,100
$75,900 -$53100= 22,800 decrease in net operating income
* $80 x (1 - 20%) = $64
**$10 x (1 - 30%) = $7
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