Sunny Days Products manufactures high end decorative pieces for home and office

Question

Sunny Days Products manufactures high end decorative pieces for home and office use. Sunny Days has received a request for a special order of 8,600 units of product AA1 for $45.50 each. The normal selling price of this product is $50.60 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product AA1 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 AA1 that would increase the variable costs by $5.20 per unit and that would require a one-time investment of $45,000 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.

Determine the effect on the company's the incremental net operating income of accepting the special order. (Omit the "$" sign in your response.)

  Direct materials $16.30      Direct labor 5.60      Variable manufacturing overhead 2.80      Fixed manufacturing overhead 5.70      Unit product cost $30.40   

Explanation / Answer

The variable cost per unit relevant for for the special order :

Direct materials + Direct labor + Variable manufacturing overhead + Increase in variable cost for special order

= $16.30 + $5.60 + $2.80 + $5.20 = $29.90 per unit

Total variable cost relevant for for the special order = 8,600 units * $29.90 per unit = $257,140

Total fixed cost relevant for for the special order =  $45,000

Total sales from special order = 8,600 units * $45.50 per unit = $391,300

Company's the incremental net operating income of accepting the special order

Total sales - Total variable cost - Total fixed cost = 391,300 - 257,140 - 45,000 = 89,160

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