Wehrs Corporation has received a request for a special order of 9,400 units of p

Question

Wehrs Corporation has received a request for a special order of 9,400 units of product K19 for $46.30 each. The normal selling price of this product is $51.40 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product K19 is computed as follows:

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 modifications made to product K19 that would increase the variable costs by $6.00 per unit and that would require a one-time investment of $45,800 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 total net operating income of accepting the special order.

Direct materials $ 17.10 Direct labor 6.40 Variable manufacturing overhead 3.60 Fixed manufacturing overhead 6.50 Unit product cost $ 33.60

Explanation / Answer

Normal Selling Price 51.40 Special Order Price 46.30 Special Order Units 9400 Relevant Costs Particulars Normal Product Cost Special Order Cost Direct materials 17.10 17.10 Direct labor 6.40 6.40 Variable manufacturing overhead 3.60 9.60 (Additional 6/- Variable Cost) Fixed manufacturing overhead 6.50 0 (Sunk cost for the decision) New Investment 0.00 4.87 (45800/9400) Unit product cost 33.60 37.97 Special Order Price 46.30 Unit product cost for Special Order 37.97 Net Benefit Per Unit 8.33 Special Order Units 9400 Total Benefit 78280 Total Net Operating Income will increase by 78280/-

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