Tullius Corporation has received a request for a special ord

Tullius Corporation has received a request for a special order of 8,000 units of product C64 for $50.00 each. The normal selling price of this product is $53.25 each, but the units would need to be modified slightly for the customer. The normal unit product cost of product C64 is computed as follows:

Direct materials $18.10

Direct labor 7.40

Variable manufacturing overhead 5.20

Fixed manufacturing overhead 4.80

Unit product cost $35.50

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 C64 that would increase the variable costs by $5.00 per unit and that would require a one-time investment of $43,000 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.

Required:

How much is the “effect” (incremental net operating income) on the company\'s total net operating income through accepting the special order?

Solution

Answer:

Amount $

Amount $

Incremental Revenue
( 8000*50)

400000

less: Incremental Cost

Direct Material( 8000*18.10)

144800

Direct Labor (( 8000*7.4)

59200

Variable manufacturing overhead
(( 8000*5.20)

41600

Modification ( 8000*5)

40000

Special Model

43000

Total Incremental Cost

328600

Incremental Net operating income

71400

Incremental Net operating income

71400