Question

Gallerani Corporation has received a request for a special order of 5,500 units of product A90 for $27.70 each. Product A90's unit product cost is $27.20, determined as follows:

Direct materials $ 2.95
Direct labor 8.25
Variable manufacturing overhead 7.35
Fixed manufacturing overhead 8.65
Unit product cost $ 27.20
Assume that 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 modifications made to product A90 that would increase the variable costs by $4.00 per unit and that would require an investment of $19,000 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. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

Multiple Choice

$(85,250)

$(38,250)

$2,750

$9,325

Answer 1

$9,325

Explanation:

The computation of Incremental net operating income(loss) is shown below:-

Per unit Total 5500 units

Incremental revenue $27.70 $152,350

Incremental costs

Direct materials $2.95 $16,225

Direct labor $8.25 $45,375

Variable manufacturing

overhead $7.35 $40,425

Increase in variable costs $4 $22,000

Purchase of special tool $19,000

Total Incremental costs $143,025

Incremental net operating income(loss) $9,325

Therefore the incremental income is $9,325