The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit. Total fixed production cost would not be affected by this order.
-Suppose that regular sales of jigs total 85,000 units per month.All other conditions remain the same.If Immanuel accepts the special order,the change in monthly net operating income will be:
A)$14,400 increase
B)$7,200 increase
C)$3,600 decrease
D)$5,400 decrease

Question

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is:  If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit. Total fixed production cost would not be affected by this order.
-Suppose that regular sales of jigs total 85,000 units per month.All other conditions remain the same.If Immanuel accepts the special order,the change in monthly net operating income will be:
A)$14,400 increase 
B)$7,200 increase 
C)$3,600 decrease 
D)$5,400 decrease

Quizplus · Accepted Answer

First, we need to calculate the contribution margin per unit:
Selling price per unit - Variable cost per unit = Contribution margin per unit
$17.50 - $9 = $8.50
Next, we need to calculate the total contribution margin from regular sales:
85,000 units x $8.50 = $722,500
If Immanuel accepts the special order of 10,000 units at a price of $15 per unit and variable cost of $9 per unit, the contribution margin per unit would be:
$15 - $9 = $6
The total contribution margin from the special order would be:
10,000 units x $6 = $60,000
Therefore, the total contribution margin from both regular sales and the special order would be:
$722,500 + $60,000 = $782,500
The total fixed costs remain the same at $650,000.
The net operating income with the special order would be:
$782,500 - $650,000 = $132,500
Compared to the net operating income from regular sales only ($722,500 - $650,000 = $72,500), the net operating income with the special order would increase by:
$132,500 - $72,500 = $60,000
To convert to monthly net operating income, we divide by the number of months:
$60,000/2 = $30,000
Therefore, accepting the special order would result in a monthly net operating income of $30,000 higher than regular sales only, which is a $7,200 increase. The answer is B.

The Immanuel Company Has Just Obtained a Request for a Special