Question

Q. Ajax Corporation has received a request for a special order of 9,900 units of product K19 for $47.40 each.

The normal selling price of this product is $52.50 each, but the units would need to be modified slightly for the customer.

The normal unit product cost of product K19 is computed as follows:

Direct materials	$	18.20
Direct labor		7.50
Variable manufacturing overhead		4.70
Fixed manufacturing overhead		7.60
Unit product cost	$	38.00

The special order would have no effect on the company's total fixed manufacturing overhead costs.

Direct materials, direct labor and variable manufacturing overhead costs are all variable with respect to the number of units produced.  

This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order.

The customer would like some modifications made to product K19 that would increase the variable costs by $7.10 per unit

and that would require a one-time investment of $46,900 in special molds that would have no salvage value.

Required:

Determine the financial advantage (disadvantage) of accepting the special order by calculating the impact it would have on net operating income.

What is the amount of the increase or the decrease, to net operaitng income, if the order is accepted?

Answer 1

	Per unit	Total 9900 units
Incremental revenue	47.40	469260
Incremental costs:
Variable costs:
Direct materials	18.20	180180
Direct labor	7.50	74250
Variable manufacturing overhead	4.70	46530
Increase in variable costs	7.10	70290
Total variable cost	37.50	371250
Fixed costs:
Purchase of special tool		46900
Total Incremental costs		418150
Incremental net operating income(loss)		51110
Increase in net operating income 51110
Financial advantage 51110