Question

A customer has requested that Inga Corporation fill a special order for 2,100 units of product K81 for $26 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $21.00:

Direct materials	$5.80
Direct labor	4.30
Variable manufacturing overhead	3.00
Fixed manufacturing overhead	7.90
Unit product cost	$21.00

   
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 manufacturing costs by $1.30 per unit and that would require an investment of $10,100 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:

Multiple Choice

• $10,500

• $14,260

• $(2,330)

• $(11,110)

Answer 1

Calulation of Addtional net income (loss) if special order is accepted

Particulars		Amount
Sales ( 2100 x $26)		$54,600
Less: Costs
Direct Materials (2100 x $5.80)	$12,180
Direct Labor (2100 x $4.30)	$9,030
Variable Manufacturing Cost [(2100 x (3.00 + 1.30)]	$9,030
Special Molds	$10,100
Total Cost		$40,340
Net increase in income (Sales - Total Cost)		$14,260

Hence,
Right answer is company's overall net operating income would increase by $14,260