Question

The Millenium Company has been approached by a new customer with an offer to purchase 10,000 units of its model F80 at a price of $3.90 each. The new customer is geographically separated from the company's other customers, and existing sales would not be affected. Millenium normally produces 75,000 units of F80 per year but only plans to produce and sell 60,000 in the coming year. The normal sales price is $12 per unit. Unit cost information for the normal level of activity is as follows:

Direct materials $1.75
Direct labor 2.50
Variable overhead 1.50
Fixed overhead 3.25
Total $9.00
Fixed overhead will not be affected by whether or not the special order is accepted.

Required:

1. Should the company accept or reject the special order?
Reject

2. By how much will operating income increase or decrease if the order is accepted?
Decrease by $

Answer 1

1. The company should reject the special order.

2. $18,500 will decrease the operating income.

Step-by-step explanation:

Per unit Total 10,000 units

Incremental revenue $3.90 $39,000

Cost of incremental

Direct materials $1.75 $17,500

Direct labor $2.50 $25,000

Variable manufacturing

overhead $1.50 $15,000

Total Incremental costs $ 57,500

Incremental net

Operating income(loss) ($18,500)

Here, we multiply per unit with total 10,000 units

1. The company should reject the special order.

2. $18,500 will decrease the operating income.