Eley Corporation produces a single product. The cost of producing and selling a

Question

Eley Corporation 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: $44.3 $12.2 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling & administrative expense Fixed selling & administrative expense $20.3 $2.0 $12.6 The normal selling price of the product is $99.1 per unit. An order has been received from an overseas customer for 1,450 units to be delivered this month at a special discounted price. This order would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $1.4 less per unit on this order than on normal sales. Direct labor is a variable cost in this company. 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 $90.9 per unit. By how much would this special order increase (decrease) the company's net operating income for the month? $46,835 O $(26,165) 0 $(18,165) O $12,235

Explanation / Answer

$46,835

Selling price per unit for special order = $90.9

Variable cost for special order

Direct materia + Direct labour + Variable manufacturing overhead + Variable selling overhead

= 44.3 + 12.2 + 1.5 + 0.6

= 58.6

Contribution margin per unit = 90.9 - 58.6 = $32.3

Since Eley corporation uses its idle capacity, there will be no additional fixed cost for the special order.

Increase in net operating income = 1450 units * $32.3 = $46,835

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