Question

please explain in details.

The manufacturing company next door produces only one product. The company's normal activity level is 32,000 units per month. The cost data for producing and selling a single unit of this product is shown below:

Direct materials	$20.20
Direct labor	$8.20
Variable manufacturing overhead	$1.20
Fixed manufacturing overhead	$10.80
Variable selling & administrative expense	$2.10
Fixed selling & administrative expense	$6.20

The normal selling price of the product is $50.50 per unit.
An order has been received from a company over seas for 2,200 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 $.40 less per unit on this order than on normal domestic sales.
Direct labor is a variable cost in this company.
Suppose there is sufficient idle capacity to produce the units required by the foreign customer and the special discounted price on the special order is $44.80 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

$29,700

$(5,940)

$8,580

$(77,440)

some other amount

Answer 1

A.$29,700

the company's operating net income for the month will increase by $29,700.

the following table shows per unit contribution from special order:

sale price	$44.80
less: variable costs
direct materials	(20.20)
direct labour	(8.20)
variable manufacturing overhead	(1.20)
variable selling and administrative expense (2.10-0.40)	(1.70)
Contribution per unit	$13.50

now,

total net operating income will increase by (contribution per unit * number of units under special order)

($13.50*2,200 units) =>$29,700.

note:fixed manufacturing overhead is not considered while evaluating special orders, since fixed costs are unchanged.