Your Company produces a single product. The cost of producing and selling a sing

Question

Your Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 40,000 units per month is as follows:

  

The normal selling price of the product is $91.60 per unit.
An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.00 less per unit on this order than on normal sales.
Direct labor is a variable cost in this company.
Required:
a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $81.90 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

Explanation / Answer

solution

Variable cost per unit on normal sales:

Direct materials .....................................................$53.60

Direct labor ............................................................5.30 Variable manufacturing overhead ......................... 1.40

...........1.60

Variable cost per unit on normal sales ..................$61.90

Variable cost per unit on special order:

Normal variable cost per unit ................................$61.90

Reduction in variable selling and administrativeexpense. .....................................1.00

Variable cost per unit on special order ..................$60.90

Selling price for special order ...............................$81.90

Variable cost per unit on special order ..................$60.90

Unit contribution margin on special order ............ $21.00

Number of units in special order ...........................3,000

Increase (decrease) in net operating income .........$63,000

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