Eley 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 40, 000 units per month is as follows: The normal selling price of the product is $86.10 per unit. An order has been received from an overseas customer for 2, 000 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 $1.20 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 $76.40 per unit.By how much would this special order increase (decrease)the company's net operating income for the month?

Question

Eley 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 40, 000 units per month is as follows:  The normal selling price of the product is $86.10 per unit. An order has been received from an overseas customer for 2, 000 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 $1.20 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 $76.40 per unit.By how much would this special order increase (decrease)the company's net operating income for the month?

Quizplus · Accepted Answer

The total variable cost per unit is $48.25 (direct materials + direct labor + variable overhead + variable selling and administrative expense). This can be calculated by adding up the variable costs per unit given in the table: $17.00 + $15.40 + $6.85 + $8.00 + $1.00.

The contribution margin per unit is $37.85 ($86.10 - $48.25). The total contribution margin on the special order would be $75,700 ($37.85 x 2,000).

The total variable selling and administrative expense on the special order would be $6,400 ($44.45 - $1.20). The total fixed costs would not change.

Therefore, the net operating income on the special order would be $69,300 ($75,700 - $6,400). This is an increase of $48,000 ($69,300 - $21,300, which is the net operating income on normal sales of 40,000 units). Therefore, the answer is C.

Eley Corporation Produces a Single Product