Wiacek Corporation has received a request for a special order of 5,700 units of

Question

Wiacek Corporation has received a request for a special order of 5,700 units of product F65 for $27.60 each. Product F65's unit product cost is $27.00, determined as follows:

8.60   

$27.00   

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 modifications made to product F65 that would increase the variable costs by $3.00 per unit and that would require an investment of $29,000 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:

A. $3,420

B. $(42,680)

C. $(64,980)

D. $6,340

Wiacek Corporation has received a request for a special order of 5,700 units of product F65 for $27.60 each. Product F65's unit product cost is $27.00, determined as follows:

Explanation / Answer

A) Sales Value = 5,700*$27.6= $157,320

B) Cost of the product

    Variable cost

       Material                                               = $2.9

       Direct labor                                         = $8.2

     variable manufacturing Overheads    = $7.8

       Additional Variable cost                      =$3

       Variable cost per unit                          =$21.4

       Total cost =Units to be sold* Variable cost per units + Special cost incurred

      = 5700*$21.4+$29,000= $150,980

C) Net operating income will be (A-B)

= Total Revenue- Total Cost

= 157,320-150,980

=$6,340

Option D will be selected

Note: Fixed Cost will have no impact on this production thus ignored for decision making.

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