A customer has requested that Inga Corporation fill a special order for 3,600 un

ID: 2499645 • Letter: A

Question

A customer has requested that Inga Corporation fill a special order for 3,600 units of product K81 for $31 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $26.50:

9.40

$26.50

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 K81 that would increase the variable manufacturing costs by $1.80 per unit and that would require an investment of $11,600 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:

Direct materials $6.80 Direct labor 5.80 Variable manufacturing overhead 4.50 Fixed manufacturing overhead

9.40

Unit product cost

$26.50

Explanation / Answer

Calculation of Increase/ (Decrease) in the company's overall net operating income, If the special order is accepted:

Incremental Revenue (3600 Units * $31)

$ 111,600

Less: Incremental Costs:

Direct materials (3600 Units * $6.80)

$ (24,480)

Direct Labor (3600 Units * $5.80)

$ (20,880)

Variable manufacturing overhead (3600 Units * $4.50)

$ (16,200)

Additional Modification costs (3600 Units * $1.80)

$ (6,480)

Less: Investment in molds

$ (11,600)

Increase in the company's overall net operating income =

$ 31,960