Eley Corporation produces a single product. The cost of producing and selling a

Question

Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 59,000 units per month is as follows:

Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 59,000 units per month is as follows $52.10 $10.00 $3.00 $21.10 $5.60 $27 Direct materlals Direct labor Variable manufacturing overhead Flxed manufacturing overhead Variable selling & administrative expense FIxed selling & administrative expense The normal selling price of the product is $124.10 per unit. An order has been recelved from an overseas customer for 3,900 units to be delivered this month at a speclal discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $3.10 less per unlt on this order than on normal sales. Direct labor is a varlable cost Iin this company Suppose there is ample Idle capacity to produce the units required by the overseas customer and the special discounted price on the speclal order is $95.40 per unit. By how much would this speclal order Increase (decrease) the company's net operating Income for the month? O $26,130 O $108,420 O $(97000) O $(91,260)

Explanation / Answer

Revenue from Special Order 372060 (3900*95.40) Less: Relevant Cost PU for Special Order 263640 (3900*67.60) Net Benefit from Special Order 108420 Answer is 108420/- Relevant Cost PU for Special Order**: PU Cost Explanation Direct Material 52.10 Relevant Cost Direct Labor 10.00 Relevant Cost Variable MOH 3.00 Relevant Cost Fixed MOH 0.00 Sunk Cost; No change Variable S&A Expense 2.50 (5.60-3.10) Fixed S&A Expense 0.00 Sunk Cost; No change Relevant Cost PU for Special Order 67.60

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