Your Corporation has received a request for a special order of 9,500 units of pr

Question

Your Corporation has received a request for a special order of 9,500 units of product AB1 for $54.00 each. The normal selling price of this product is $60.99 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product AB1 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 AB1 that would increase the variable costs by $4.00 per unit and that would require a one-time investment of $40,000 in a special jig 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.

Directions:  Determine the effect on the company's total net operating income of accepting the special order. Show your work!

Unit product costs, current Direct Materials $    19.50 Direct Labor $ 8.10 Variable MOH $ 5.00 Fixed MOH $ 5.50 Total unit product cost $    38.10

Explanation / Answer

Answers

Units

per unit

Amount

Sales revenue

9500

$                       54.00

$       5,13,000.00

(-) Variable costs:

Direct material

9500

$                       19.50

$       1,85,250.00

Direct labor

9500

$                         8.10

$           76,950.00

variable MOH

9500

$                         5.00

$           47,500.00

Increase in variable cost

9500

$                         4.00

$           38,000.00

Total variable cost

9500

$                       36.60

$       3,47,700.00

Contribution margin

9500

$                       17.40

$       1,65,300.00

(-) Additional Investment fixed cost

$           40,000.00

Net Income from Offer

$       1,25,300.00

Units

per unit

Amount

Sales revenue

9500

$                       54.00

$       5,13,000.00

(-) Variable costs:

Direct material

9500

$                       19.50

$       1,85,250.00

Direct labor

9500

$                         8.10

$           76,950.00

variable MOH

9500

$                         5.00

$           47,500.00

Increase in variable cost

9500

$                         4.00

$           38,000.00

Total variable cost

9500

$                       36.60

$       3,47,700.00

Contribution margin

9500

$                       17.40

$       1,65,300.00

(-) Additional Investment fixed cost

$           40,000.00

Net Income from Offer

$       1,25,300.00

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