Question

Elhard comp produces one product. The cost of producing and selling a single unit of this product at the companys normal activity level of 40,000 units per month is as follows: DM...........................$18 DL...........................$6.80 VMOH....................$2.40 FMOH....................$11.60 VS&A.....................$1.90 FS&A.....................$5.10 The normal selling price per unit is $51.10 per unit An order has been recieved from an overseas customer for 2,000 units to be delivered this month at a special discounted price. The order would have no effect on the companies normal sales and would not change the toal amount of the companys fixed exps. The VS&A exp would be $0.10 less per unit on this order than on normal sales. DL is a variable cost in this comp. Supposee there is ample idle capacity to produce the units required by the overseas customer and the special price on the order is $41.60 per unit. By how much would this special order increase (decrease) the companys NOI for the month?

1) $2,000
2) $25,200
3) $(8400)
4) $(18,800)

Answer 1

The special order will increase the company's net operating income (NOI) by $25,200, by considering the special selling price and variable costs per unit for the order of 2,000 units.

Step-by-step explanation:

To calculate how much the special order will increase or decrease the company's net operating income (NOI), we only consider the variable costs and the special selling price because fixed costs remain unchanged. The variable costs per unit for this special order are $18 (Direct Materials) + $6.80 (Direct Labor) + $2.40 (Variable Manufacturing Overhead) + $1.80 (Variable Selling & Administrative, which is $0.10 less as stated). Summing these gives a total variable cost of $29 per unit.

The special price is $41.60 per unit. Therefore, the contribution margin per unit is $41.60 - $29 = $12.60. For the special order of 2,000 units, the total increase in NOI is 2,000 units x $12.60, which equals $25,200. The cost of producing and selling a single unit at the company's normal activity level is $45.80, while the selling price for the special order units is $41.60 per unit. The difference in cost is $45.80 - $41.60 = $4.20 per unit.