Question

Tullius Corporation has received a request for a special order of 8,000 units of product C64 for $50.00 each. The normal selling price of this product is $53.25 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 $18.10
Direct labor 7.40
Variable manufacturing overhead 5.20
Fixed manufacturing overhead 4.80
Unit product cost $35.50

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 C64 that would increase the variable costs by $5.00 per unit and that would require a one-time investment of $43,000 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.

Required:
How much is the 'effect' (incremental net operating income) on the company's total net operating income through accepting the special order?

Answer 1

Answer:

Incremental operating income   = $71,400

Explanation:

Unit variable cost = 18.10 + 7.4+ 5.20 + 5 = $35.7

Note that the $5 additional variable cost was necessitated by the special order , hence it was added

Sales from special order = ( 8,000× $50)                     400,000

Variable cost         ( 8,000 ××  $35.7                              ( 285600 )

Cost of special machine                                                (43,000)

Incremental operating income                                       71,400

Incremental operating income   = $71,400

Note that the fixed costs were not considered in the analysis , this simply because they are not relevant to the special order decision.. They would be incurred either way, whether the special order is accepted or not