Wehrs Corporation has received a request for a special order of 9,500 units of p

Question

Wehrs Corporation has received a request for a special order of 9,500 units of product K19 for $46.40 each. The normal selling price of this product is $51.50 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product K19 is computed as follows:

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 some modifications made to product K19 that would increase the variable costs by $6.10 per unit and that would require a one-time investment of $45,900 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.

Required:

Determine the effect on the company's total net operating income of accepting the special order.

Direct materials $ 17.20 Direct labor 6.50 Variable manufacturing overhead 3.70 Fixed manufacturing overhead 6.60 Unit product cost $ 34.00

Explanation / Answer

Per unit Total 9500 units Incremental revenue 46.4 440800 Incremental costs: Variable costs: Direct materials 17.2 163400 Direct labor 6.5 61750 Variable manufacturing overhead 3.7 35150 Modifications cost 6.1 57950 Total variable cost 33.5 318250 Fixed costs: Purchase of special tool 45900 Total Incremental costs 364150 Incremental net operating income(loss) 76650 Profit increases by $76650

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