Question

27.

Wehrs Corporation has received a request for a special order of 9,500 units of product K19 for $47.00 each. The normal selling price of this product is $52.10 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	$	17.80
Direct labor		7.10
Variable manufacturing overhead		4.30
Fixed manufacturing overhead		7.20
Unit product cost	$	36.40

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 some modifications made to product K19 that would increase the variable costs by $6.70 per unit and that would require a one-time investment of $46,500 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.

Required:

Determine the effect on the company's total net operating income of accepting the special order.

Answer 1

Variable cost per unit for special order = Direct materials + Direct labor + Variable manufacturing Overhead + Additional variable cost

= 17.80 + 7.10 + 4.30 + 6.70 = 35.90

Total variable cost for 9500 units = 35.90*9500 = 341050

One time investments in special molds = 46500

Total cost for special order = Total variable cost for 9500 units + One time investments in special molds

= 341050 + 46500 = 387550

Total sales amount received from special order = 9500 units *47 = 446500

Net operating income from special order = Total sales amount received from special order - Total cost for special order

= 446500 - 387550 = 58950

Company's total net operating income will be increased by $58950 if special order is accepted.