A customer has requested that Inga Corporation fill a special order for 2,700 un

ID: 2490110 • Letter: A

Question

A customer has requested that Inga Corporation fill a special order for 2,700 units of product K81 for $32 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $22.00: Direct materials $ 6.30 Direct labor 4.00 Variable manufacturing overhead 3.40 Fixed manufacturing overhead 8.30 Unit product cost $22.00 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 K81 that would increase the variable costs by $1.90 per unit and that would require an investment of $17,000 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: $27,280 $17,200 $(2,500) $(16,700)

Explanation / Answer

Income statement of special order:

Particulars

Amount

Sales (2,700 × $32 =)

$86,400

Less: Variable costs:

Direct material (2,700 × $6.30 =)

$17,010

Direct labor (2,700 × $4 =)

$10,800

Overhead (2,700 × $3.40 =)

$9,180

Additional (2,700 × $1.90 =)

$5,130

Total variable costs

$42,120

Contribution

$44,280

Less: Avoidable fixed cost (investment)

$17,000

Net operating income

$27,280

Note: Fixed manufacturing overhead $8.30 should not be considered here, because this is unavoidable.

Answer: Net operating income would increase by $27,280