Question

The Melrose Corporation produces a single product, Product C. Melrose has the capacity to produce 110,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows:

Direct materials	$	34.00
Direct labor	$	25.00
Variable manufacturing overhead	$	19.00
Fixed manufacturing overhead	$	24.00
Variable selling expense	$	16.00
Fixed selling expense	$	10.00

The regular selling price of one unit of Product C is $152.00. A special order has been received by Melrose from Moore Corporation to purchase 6,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit of product C in the special order. The machine will cost $11,100 and will have no use after the special order is filled. Assume that direct labor is a variable cost.

Assume Melrose expects to sell 100,000 units of Product C to regular customers next year. If Moore company offers to buy the 6,000 special units at $142.00 per unit, the effect of accepting the special order on Melrose's net operating income for next year will be:

Answer 1

The effect of accepting the special order on Melrose's net operating income for next year will be:

Description		Amount
Incremental revenue (6000 x $142)		$852,000
Less: incremental cost
Direct material (6000 x $34 per unit)	$ 204,000
Direct labor (6000 x $25 per unit)	150,000
Variable manufacturing overhead (6000 x $19 per unit)	114,000
Variable selling expenses 6000 x (75% of 16)	24,000
specialized machine	11,100
Total incremental cost		$503,100
Incremental Net Operating Income		$348,900

Net Operating Income will increase by $348,900

Note : there is no opportunity loss as company having idle capacity