Elfalan 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 52,000 units per month is as follows: The normal selling price of the product is $110.10 per unit.An order has been received from an overseas customer for 3,200 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 $2.40 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 $88.40 per unit. The monthly financial advantage (disadvantage) for the company as a result of accepting this special order should be:
A) ($63,000)
B) $21,440
C) $84,480
D) ($50,240)

Question

Elfalan 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 52,000 units per month is as follows:  The normal selling price of the product is $110.10 per unit.An order has been received from an overseas customer for 3,200 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 $2.40 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 $88.40 per unit. The monthly financial advantage (disadvantage) for the company as a result of accepting this special order should be:
A) ($63,000) 
B) $21,440 
C) $84,480 
D) ($50,240)

Quizplus · Accepted Answer

Selling price per unit = $110.10
Less: Discounted price per unit = $88.40
Less: Variable selling and administrative expense saved = $2.40 per unit
Contribution margin per unit on special order = $110.10 - $88.40 - $2.40 = $19.30

Therefore, the total contribution margin on the special order will be:
$19.30 x 3,200 units = $61,760

Since this order would not change the total amount of the company's fixed costs, the entire contribution margin will increase the company's net operating income. Hence, the monthly financial advantage for the company as a result of accepting this special order should be $61,760.

However, to verify that there is ample idle capacity to produce the units required by the overseas customer, management should perform a capacity analysis before accepting the special order.

Elfalan Corporation Produces a Single Product