Question

Elhard Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows: Direct materials...................................................... $18.00 Direct labor.......................................................... $6.80 Variable manufacturing overhead.......................... $2.40 Fixed manufacturing overhead............................. $11.60 Variable selling and administrative expense.......... $1.90 Fixed selling and administrative expense............. $5.10 The normal selling price of the product is $51.10 per unit. An order has been received from an overseas customer for 2,000 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 $0.10 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 the special order is $41.60 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? Multiple Choice $25,200 $2,000 $(18,800) $(8,400)

Answer 1

Variable selling and administrative expenses = $1.90

In the special order, Variable selling and administrative expenses will be $0.10 less.

Thus, Variable selling and administrative expenses in the special order = 1.90-0.10 = $1.80

Fixed manufacturing overhead and Fixed selling and administrative expenses will not increase due to the acceptance of special order.

Analysis of Special Order
Sales revenue ( 2,000 x 41.60)	83,200
Expenses:
Direct materials (2,000 x 18)	-36,000
Direct labor (2,000 x 6.80)	-13,600
Variable manufacturing overhead (2,000 x 2.40)	-4,800
Variable selling and administrative expenses (2,000 x 1.80)	-3,600
Net operating income	$25,200

By accepting special order, net operating income will increase by $25,200.

First option is correct.

Kindly comment if you need further assistance.

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