Question

A customer has requested that Inga Corporation fill a special order for 2,000 units of product K81 for $25.00 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $19.90: 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 K81 that would increase the variable costs by $1.20 per unit and that would require an investment of $10,000 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:

Answer 1

If the special order is accepted, the company's overall net operating income would increase (decrease) by $13,000

Solution:

Added revenues :  $50,000 (2,000 x $25)

Added Costs:

Current variable costs  :  5.60 + 4.00 + 2.70 = $12.30

Variable costs for special order  :  12.30 + 1.20 = $13.50

Total special order variable costs  :  $27,000 (2,000 x $13.50)

$10,000 special order

       = $37,000 total costs for special order

∴  50,000 - 37,000 =  $13,000