Question

Tullius Corporation has received a request for a special order of 9,200 units of product C64 for $46.10 each. The normal selling price of this product is $51.20 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product C64 is computed as follows:

Direct materials $17.90
Direct labor 7.20
Variable manufacturing overhead 4.40
Fixed manufacturing overhead 7.30
Unit product cost $36.80

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 Z74 that would increase the variable costs by $6.80 per unit and that would require a one-time investment of $46,600 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:
Calculate the incremental net operating income of accepting the special order.

Answer 1

Incremental net income $ 43,560

Step-by-step explanation:

In order to carry out an incremental analysis, only relevant cash flows should be considered.

The relevant cash flows from accepting the special order are

1. sales revenue at the offer price of $46.10 × 9200 = 424,120

2. the variable costs -(17.90+7.20+4.40 + 6.80) × 9200 =(333,960)

3. Cost of special molds = (46,600)

Incremental net income 43,560

Please, note that the fixed costs are not relevant for this decision. Simply because they would be incurred either way and that they are not completely traceable to this special order