Question

Eley Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 50,000 units per month is as follows:

Direct materials	$47.60
Direct labor	$9.10
Variable manufacturing overhead	$2.10
Fixed manufacturing overhead	$19.30
Variable selling & administrative expense	$3.80
Fixed selling & administrative expense	$18

The normal selling price of the product is $106.10 per unit.

An order has been received from an overseas customer for 3,000 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 $2.20 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 $86.40 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

Answer 1

If the special order is accepted, the company's net operating income for the month would increase by $78,000

Particulars	Per Unit	3,000 Units
Incremental sales	$86.40	$259,200
Incremental costs ;
Direct materials	$47.60	$142,800
Direct labor	$9.10	$27,300
Variable manufacturing overhead	$2.10	$6,300
Variable selling and administrative [ $3.80 - $2.20 ]	$1.60	$4,800
Total incremental costs	$60.40	$181,200
Incremental profits	$26.00	$78,000