Question

Gallerani Corporation has received a request for a special order of 5,000 units of product A90 for $28.50 each. Product A90's unit product cost is $27.85, determined as follows: Direct materials$3.35 Direct labor 8.65 Variable manufacturing overhead 7.75 Fixed manufacturing overhead 8.10 Unit product cost$27.85 The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product F65 that would increase the variable costs by $4.80 per unit and that would require an investment of $15,000 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. If the special order is accepted, the company's overall net operating income would increase (decrease) by:

$(92,750)

$3,250

$4,750

$(35,750)

Answer 1

The correct answer is the third option $4,750

Step-by-step explanation:

Special order

Selling price 28.5

Less

Direct material 3.35

Direct labor 8.65

Variable manufacturing OH 7.75

Additional variable cost per unit 4.8 24.55

Contribution per unit 3.95

Number of units 5000

Total contribution 19750

Less additional fixed cost 15000

Incremental profit 4750

Hence 3rd option is the correct answer.

Answer 2

Increase in net income $4,750.00

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 the variable costs and the sales revenue. Please, note that the fixed costs are not relevant for this decision. Simply because they would be incurred either way.

The relevant variable costs include:

$

sales revenue (28.50× 5,000) = 142500

Variable cost (3.35 + 8.65 + 7.75+ 4.80) ( 122,750)

Cost of special machine ( 15,000)

Increase in net operating income 4,750