Question

Your Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 30,000 units per month is as follows:

Direct materials                                       $20.40

Direct labor                                              $8.70

Variable manufacturing overhead.           $1.20

Fixed manufacturing overhead                $10.60

Variable selling & administrative costs     $2.60

Fixed selling & administrative costs.        $5.90

The normal selling price of the product is $51.10 per unit. Current demand is 25,000 units.
An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price of $44.70 per unit 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 $0.50 less per unit on this order than on normal sales. By how much would this special order increase (decrease) the company's net operating income for the month?

Answer 1

Analysis of Special Order
Sales ( 3,000 x 44.70)	134,100
Expenses:
Direct materials ( 3,000 x 20.40)	-61,200
Direct labor ( 3,000 x 8.70)	-26,100
Variable manufacturing overhead ( 3,000 x 1.20)	-3,600
Variable selling & administrative costs ( 3,000 x 2.10)	-6,300
Total expenses	-97,200
Net Operating Income	$36,900

By accepting special order, net operating income of the company would increase by $36,900

Hence, special order should be accepted.

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