Wiacek Corporation has received a request for a special order of 4, 000 units of product F65 for $26.60 each.Product F65's unit product cost is $25.80, 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 F65 that would increase the variable costs by $3.00 per unit and that would require an investment of $23, 000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales.The company has ample spare capacity for producing the special order.If the special order is accepted, the company's overall net operating income would increase (decrease)by:
A)$(31, 800)
B)$3, 800
C)$3, 200
D)$(48, 400)

Question

Wiacek Corporation has received a request for a special order of 4, 000 units of product F65 for $26.60 each.Product F65's unit product cost is $25.80, 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 F65 that would increase the variable costs by $3.00 per unit and that would require an investment of $23, 000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales.The company has ample spare capacity for producing the special order.If the special order is accepted, the company's overall net operating income would increase (decrease)by:
A)$(31, 800) 
B)$3, 800 
C)$3, 200 
D)$(48, 400)

Quizplus · Accepted Answer

To determine the impact on the company's overall net operating income, we need to compare the incremental revenues and costs associated with the special order.

Incremental revenue per unit = selling price per unit for special order - unit product cost of F65 = $26.60 - $25.80 = $0.80

Total incremental revenue = incremental revenue per unit x number of units in special order = $0.80 x 4,000 = $3,200

Incremental cost per unit = increase in variable cost per unit + cost of special molds / number of units in special order = ($3.00 + $23,000 / 4,000) = $8.75

Total incremental cost = incremental cost per unit x number of units in special order = $8.75 x 4,000 = $35,000

Incremental net operating income = incremental revenue - incremental cost = $3,200 - $35,000 = $(31,800)

Therefore, accepting the special order would decrease the company's overall net operating income by $(31,800). The answer is B because it is the only positive option.

Wiacek Corporation Has Received a Request for a Special Order