Holtrop Corporation has received a request for a special order of 9,000 units of

Question

Holtrop Corporation has received a request for a special order of 9,000 units of product Z74 for $45.90 each. The normal selling price of this product is $51.00 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product Z74 is computed as follows Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead $16.70 6.00 3.20 6.10 Unit product cost $32.00 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 some modific ations made to product Z74 that would increase the variable costs by $5.60 per unit and that would require a one-time investment of $45,400 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order Required Determine the effect on the company's the incremental net operating income of accepting the special order. (Omit the "$" sign in your response.) Incremental net operating income

Explanation / Answer

Answer:

Understanding from the above questions, that there are 3 questions. I am giving answer 1 by 1.

1) In order to determine the effect of Special Order on company’s net operating income, we need to calculate Contribution Margin from Special Order. Since Special Order would have no effect on Fixed Manufacturing Overhead hence it is irrelevant in calculating Contribution Margin:

Particulars

Amount

Sales (9,000 Unit @ $45.90)

$413,100

Less: Variable Cost (note 1) (9,000 x $31.50)

($283,500)

Contribution Margin

$129,600

Less: One Time Investment in Special Molds

($45,400)

Net Contribution Margin from Special Order

$84,200

Accepting Special Order would increase the Company’s Net Operating Income by $84,200

Incremental Net Operating Income by accepting Special Order $84,200

Note 1 : Calculation of Variable Cost Per Unit for Special Order

Particulars

Amount

Direct Material per Unit

$16.70

Direct Labour per Unit

$6.00

Variable Manufacturing Overhead per unit

$3.20

Cost of Modification per Unit

$5.60

Variable Cost Per Unit

$31.50

Note2: One Time Investment in Special Molds $45,400 is relevant cost. It will incur due to accepting Special Order hence it should be considered while calculating the Contribution Margin from Special Order.

2) Labour Rate Variance is arises due to difference in actual rate paid from standard rate.

Labour Rate Variance = Actual Time (Standard Rate – Actual Rate)

Labour Rate Variance = Actual Time x Standard Rate – Actual Time x Actual Rate = (11,000 hours x $15.95) - $173,030 = $175,450 - $173,030 = $2,420 U

Here Actual Time means time for which wages have been paid.

3) Calculation of Standard Hours allowed for December’s production

Labour efficiency variance arises due to difference in the working hour from the set standard.

Labour Efficiency Variance = Standard Rate (Standard Hours for actual output – Actual Hours)

- $1,500 = $10 (Standard Hours for actual output – 5,600)

Standard Hours for Actual Output = ($56,000 - $1,500) / $10 = 5,450 Hours

Particulars

Amount

Sales (9,000 Unit @ $45.90)

$413,100

Less: Variable Cost (note 1) (9,000 x $31.50)

($283,500)

Contribution Margin

$129,600

Less: One Time Investment in Special Molds

($45,400)

Net Contribution Margin from Special Order

$84,200

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