Question

Globe Manufacturing Company has just obtained a request for a special order of 12,000 units to be shipped at the end of the current year at a discount price of $7.00 each. The company has a production capacity of 90,000 units per year. At present, Globe is only selling 80,000 units per year through regular channels at a selling price of $11.00 each. Globe's per unit costs at an 80,000 unit level of production and sales are as follows:

Variable manufacturing expenses $4.60
Fixed manufacturing expenses $1.80
Variable selling and administrative expenses $1.00
Fixed selling and administrative expenses $0.45

Variable selling and administrative expense will drop to $0.30 per unit on the special order units. The special order has to be taken in its entirety. This means that by accepting the special order, Globe will be forced to not sell 2,000 units to its regular customers.

Required:
If Globe accepts this special order, by what amount will its net operating income increase or decrease?

Answer 1

Globe Manufacturing Company

f Globe accepts this special order, its net operating income will decrease by:

= $19,300.

Step-by-step explanation:

a) Data and Calculations:

Special order units = 12,000

Special order price = $7.00 each

Annual Production Capacity = 90,000 units

Annual Sales Units = 80,000

Normal selling price = $11

Per unit costs at 80,000 units level:

Variable manufacturing expenses $4.60

Fixed manufacturing expenses $1.80

Variable selling and administrative expenses $1.00

Fixed selling and administrative expenses $0.45

Variable manufacturing expenses $4.60 * 12,000 = $55,200

Fixed manufacturing expenses $1.80 * 10,000 = $18,000

Variable selling and administrative expenses $0.30 * 12,000 = $3,600

Fixed selling and administrative expenses $0.45 * 10,000 = $4,500

Lost revenue from non-sale of 2,000 at $11 = $22,000

Total costs of special order = $103,300

Sales revenue from special order = $84,000 ($7 * 12,000)

The net operating income will decrease by $19,300 ($103,300 - $84,000)