8. The Immanuel Company has just obtained a request for a special order of 6,000

Question

8.         The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is:

                        Variable production cost:                    $4.60

                        Fixed production cost:                                    1.80

                        Variable selling expense:                     1.00

If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit.

If Immanuel accepts this special order, what will be the increase or decrease in monthly net operating income. (Worth 2.5 pts.) SHOW ALL WORK FOR CREDIT!

           

In addition to the special order’s effect on income, what are some of the other longer-term quantitative and qualitative factors that the company’s managers should consider before deciding whether to accept the offer? (Worth 1.5 pts.; must list at least three factors for full points.)

Explanation / Answer

Contribution on normal selling

$5.40

Contribution if Special oder done

on accepting special oder operating profit will increase

Selling Price per unit $11.00 Less: Relevant cost of Manufacturing Variable production cost $4.60 Variable Selling Expense $1.00 $5.60 Contribution per unit

$5.40

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