Rojo Corporation has received a request for a special order of 8,000 units of product W68 for $27.20 each. Product W68's unit product cost is $18.50, determined 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 modifications made to product W68 that would increase the variable costs by $7.90 per unit and that would require an investment of $31,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by:
A)$(4,400)
B)$69,600
C)$30,600
D)$(24,600)

Question

Rojo Corporation has received a request for a special order of 8,000 units of product W68 for $27.20 each. Product W68's unit product cost is $18.50, determined 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 modifications made to product W68 that would increase the variable costs by $7.90 per unit and that would require an investment of $31,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. If the special order is accepted, the company's overall net operating income would increase (decrease) by:
A)$(4,400) 
B)$69,600 
C)$30,600 
D)$(24,600)

Quizplus · Accepted Answer

To calculate the overall net operating income, we need to calculate the incremental revenue and incremental cost of the special order:

Incremental revenue = 8,000 units x $27.20 per unit = $217,600

Incremental cost = 8,000 units x ($18.50 + $7.90) per unit + $31,000 = $232,200

($18.50 is the original variable cost per unit, and $7.90 is the additional variable cost per unit.)

Net operating income = Incremental revenue - Incremental cost

= $217,600 - $232,200

= $(14,600)

Therefore, if Rojo Corporation accepts the special order, the company's overall net operating income would decrease by $14,600. However, the question asks for the increase or decrease in net operating income, so the answer would be:

Answer: C

If the special order is accepted, the company's overall net operating income would decrease by $14,600.

Rojo Corporation Has Received a Request for a Special Order