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

The increase in unit product cost due to modifications is $3.00. Hence, the new unit product cost for F65 will be $28.80 ($25.80 + $3.00).
Total incremental cost for the special order = Incremental variable cost per unit × Units ordered + Incremental fixed cost
= $3.00 × 4,000 + $23,000
= $35,000
The revenue from the special order = Selling price per unit × Units ordered
= $26.60 × 4,000
= $106,400
The incremental profit from the special order = Incremental revenue - Incremental cost
= $106,400 - $35,000
= $71,400
This incremental profit will increase the overall net operating income of the company. Therefore, the answer is B.

Wiacek Corporation Has Received a Request for a Special Order