Question

Eley Corporation produces a single product. The cost of producing and selling a single unit of the product at the company's normal activity level of 46,000 units per month is as follows:

Direct materials $45.60
Direct labor $8.70
Variable manufacturing overhead $1.70
Fixed manufacturing overhead $18.50
Variable selling & administrative expense $3.00
Fixed selling & administrative expense $14
A normal selling price of the product is $98.10 per unit.

An order has been received from an overseas customer for 2,600 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.80 less per unit on this order than on normal sales. Direct labor is a variable cost in this company.

Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on this order is $82.40 per unit. By how much would this special order increase or decrease the company's net operating income for the month?

Answer 1

The special order would increase the company's net operating income for the month by $65,520

Step-by-step explanation:

Consider the Incremental Costs and Revenues arising from this special order. Fixed Costs and all applied overheads are irrelevant for this decision.

Sales (2,600 units×$82.40) 214,240

Direct materials ($45.60 ×2,600 units) (118,560)

Direct labor ($8.70 ×2,600 units) (22,620)

Variable manufacturing overhead ($1.70 ×2,600 units) (4,420)

Variable selling & administrative expense ($1.20×2,600 units) (3,120)

Incremental Income/(loss) 65,520

Therefore, the special order would increase the company's net operating income for the month by $65,520.