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 57,000 units per month is as follows:

An order has been received from an overseas customer for 3,700 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $2.90 less per unit on this order than on normal sales.

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 $93.40 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?

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 57,000 units per month is as follows:

Explanation / Answer

Additional cost for this orderof 3700 unit A B=A*3700 Unit Total Direct material $51.10 $189,070 Direct labor $9.80 $36,260 Variable manufacturing overhead $2.80 $10,360 Fixed manufacturing overhead $0 $0 (5.2-2.9)=$2.3 per unit Variable selling &admin. Expenses $            2.30 $8,510 Fixed selling &admin. Overhead $0 $0 A Total additional cost $66.00 $244,200 B Additional Revenue from this order $93.40 $345,580 C=B-A Increase in net operating income $27.40 $101,380 Increase in ne operating income for the month $101,380

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