Question

Wehrs Corporation has received a request for a special order of 9,000 units of product K19 for $45.90 each. The normal selling price of this product is $51.00 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 $16.70 6.00 3.20 6.10 $32.00 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 K19 that would increase the variable costs by $5.60 per unit and that would require a one-time investment of $45,400 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. Increase Decrease

Answer 1

Answer:

Increase

$ 84,200

Calculations:

Variable cost per unit
Direct materials	$ 16.70
Direct labor	$ 6.00
Variable manufacturing overhead	$ 3.20
Total	$ 25.90
Add: increase per unit	$ 5.60
Total variable cost per unit	$ 31.50

.

Special Order
Incremental sales [9,000 units x $45.90]		$ 413,100
Incremental variable costs [9000 units x $31.50]	$ 283,500
Incremental Fixed costs	$ 45,400	$ 328,900
Increase(decrease) in net operating income		$ 84,200