A customer has requested that Inga Corporation fill a special order for 2,300 un

Question

A customer has requested that Inga Corporation fill a special order for 2,300 units of product K81 for $28 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $21.80:

Direct materials $ 5.90

Direct labor 5.00

Variable manufacturing overhead 3.00

Fixed manufacturing overhead 7.90

Unit product cost $21.80

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 K81 that would increase the variable costs by $1.50 per unit and that would require an investment of $13,000 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:

$(12,700) $15,980 $(2,100) $13,200

Explanation / Answer

Answer:

Since the company has ample spare capacity for producing the special order, there would be no incremental fixed cost. Only variable cost will be considered.

Calculation of unit product cost for special order:

Calculation of contribution margin for special order:

Contribution margin per unit for this special order = Selling price per unit for special order - Total product cost per unit fpr special order

Contribution margin per unit for this special order = $28 - $15.40(as calculated above) = $12.60 per unit

Total contribution margin for special order = Contribution margin per unit * Special order quantity

Total contribution margin for special order = $12.60 * 2300 units = $28980

Since this special order requires an investment of $13,000 in special molds that would have no salvage value, therefore, :

Net increase (decrease) in net operating income = Total contribution margin for special order - Investment made in special molds

Net increase (decrease) in net operating income = $28980 - $13,000 = $15980

Therefore, If the special order is accepted, the company's overall net operating income would increase by $15980.

Particulars Amount Direct material cost per unit (a) $       5.90 Direct labor cost per unit (b) $       5.00 Variable manufacturing overhead per unit© $       3.00 Increment in variable cost per unit (d) $       1.50 Total product cost per unit (a)+(b)+©+(d) $    15.40

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