Question

Mcniff Corporation makes a range of products. The company's predetermined overhead rate is $26 per direct labor-hour, which was calculated using the following budgeted data:

Variable manufacturing overhead	$	32,000
Fixed manufacturing overhead	$	384,000
Direct labor-hours		16,000

Management is considering a special order for 800 units of product O96S at $74 each. The normal selling price of product O96S is $85 and the unit product cost is determined as follows:

Direct materials	$	47.00
Direct labor		18.00
Manufacturing overhead applied		26.00
Unit product cost	$	91.00

If the special order were accepted, normal sales of this and other products would not be affected. The company has ample excess capacity to produce the additional units. Assume that direct labor is a variable cost, variable manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing overhead would not be affected by the special order.

Required:

The financial advantage (disadvantage) for the company as a result of accepting this special order would be:

The management of Bonga Corporation is considering dropping product D74F. Data from the company's accounting system for this product for last year appear below:

Sales	$	931,000
Variable expenses	$	410,000
Fixed manufacturing expenses	$	345,000
Fixed selling and administrative expenses	$	252,000

All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $212,000 of the fixed manufacturing expenses and $123,000 of the fixed selling and administrative expenses are avoidable if product D74F is discontinued.

According to the company's accounting system, what is the net operating income (loss) earned by product D74F? Include all costs in this calculation—whether relevant or not.

Multiple Choice

• $76,000

• ($521,000)

• ($76,000)

• $521,000

Answer 1

Since the company has spare capacity, no additional fixed costs will be incurred

Financial Advantage = Revenues – Incremental Costs

= (74 – 47-18-2)*800

= $5,600

net operating income (loss) earned by product D74F As per Accounting system

= 931000-410000-345000-252000

= ($76000)