5. (TCO D) A customer has asked Clougherty Corporation to supply 4,000 units of

Question

5. (TCO D) A customer has asked Clougherty Corporation to supply 4,000 units of product M97, with some modifications, for $40.10 each. The normal selling price of this product is $48.00 each. The normal unit product cost of product M97 is computed as follows. Direct Materials $18.50 Direct Labor $1.20 Variable manufacturing overhead $8.40 Fixed manufacturing overhead $3.90 Unit product cost $32.00 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 M97 that would increase the variable costs by $5.70 per unit and that would require a one-time investment of $31,000 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. Required: Determine the effect on the company's total net operating income of accepting the special order. Show your work!

Explanation / Answer

Extra revenue gain = 4000 x 40.10 = $160400 Extra cost = 4000 x (18.5 + 1.2 + 8.4 + 5.7) +31000 = $166200 Decrease in net operating income = 160400 - 166200 = $5800 (negative since it is a decrease) Hope this helps!

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