Question

A customer has requested that Gamba Corporation fill a special order for 2,300 units of product Q41 for $37 a unit. While the product would be modified slightly for the special order, product Q41 normal unit product cost is $16.20:

Direct materials	$ 4.70
Direct labor	3.00
Variable manufacturing overhead	1.80
Fixed manufacturing overhead	6.70
Unit product cost	$16.20

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 Q41 that would increase the variable costs by $1.80 per unit and that would require an investment of $17,000 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:

Answer 1

Selling price = $37

Cost per unit = Direct material + Direct labour + Variable overhead

= 4.70 + 3.00 + 1.80

= $9.50

As the company's total fixed manufacturing overhead will not be affected by the special order therefore it cost will not be added in the unit cost.

Increase in variable cost = $1.80

Special investment = 17,000

Per unit cost = 17,000/2, 300 = $7.39

Total unit cost

= 9.50 + 1.80 + 7.39

= $18.69

Units = 2,300 units

Therefore the net operating income will increase by

= (37-18.69) *2, 300

= $42, 113

If you find the answer helpful please upvote.

answered by: anonymous