Our company received a request for a special order of 9,000 units of our window

Question

Our company received a request for a special order of 9,000 units of our window shades for $45.90 each. The normal selling price of this shade is $51.00 each, but the units would need to be modified slightly for the customer. The normal unit product cost of shade is calculated as follows: Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. Our customer would like some modifications made to the shade that would increase the variable costs by $5.60 per shade and that would require a one-time investment of $45,400 in special equipment that would have no salvage value. This special order has no effect on our other product sales. We have plenty of spare capacity for manufacturing the special order and our company president would really like to accept the opportunity. What is the effect on the company's net operating income of accepting the special order? Should we accept the order?

Explanation / Answer

Total variable cost for new product:

Present variable cost + 5.60 =   16.70+6+3.20+5.60   =    31.50

Selling Price:            45.90

Contribution    (45.90 - 31.50 )   = 14.40

Total Contribution : Units sale * Contribution per unit:   9,000 * 14.40 =   129,600

Increse in Net Income: Contribution - Fixed cost   129,600 - 45,400   = 84,200

Net operating income will increase by $ 84,200 , we should accept the offer

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