Question

Wehrs Corporation has received a request for a special order of 8,600 units of product K19 for $45.50 each. The normal selling price f 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 K19 is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Unit product cost $16.30 5.60 2.80 $30.40 irect labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The ustomer would like some modifications made to product K19 that would increase the variable costs by $5.20 per unit and that would equire 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.
Required: Determine the effect on the company's total net operating income of accepting the special order

Answer 1

Answer:

Increase in the net income=$ 89,160

Explanation:

The amount of the financial advantage or disadvantage would be determined as follows:  

Unit variable cost of order = 16.30 + 5.60+ 2.80+5.20 = 29.9

                                                                                                               $

Sales from special order)  ($45.50× 8,600)                              391300

Variable cost of special order ($29.9× 8,600)                           257,140

Contribution from special order                                                  134,160

Cost of special machine                                                              (45,000)

Increase in contribution                                                               89,160

Increase in the net income=$ 89,160

Note the fixed manufacturing overhead is irrelevant, they are cost that would be incurred whether or not the order is accepted