Elgot Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 30,000 units per month is as follows: The normal selling price of the product is $51.10 per unit.
An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.50 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 $44.70 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?
A) $5,100
B) $(14,100)
C) $36,900
D) $(17,700)

Question

Elgot Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 30,000 units per month is as follows:  The normal selling price of the product is $51.10 per unit.
An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.50 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 $44.70 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?
A) $5,100 
B) $(14,100) 
C) $36,900 
D) $(17,700)

Quizplus · Accepted Answer

First, let's calculate the contribution margin per unit for the normal sales:

Selling price per unit - Variable cost per unit = Contribution margin per unit

$51.10 - ($16.50 + $5.00 + $0.80) = $28.80

Now, let's calculate the contribution margin per unit for the special order:

Selling price per unit - Variable cost per unit = Contribution margin per unit

$44.70 - ($16.00 + $4.50 + $0.30) = $23.90

The difference in contribution margin per unit between normal sales and the special order is $28.80 - $23.90 = $4.90

Therefore, the total increase in net operating income for the special order would be:

$4.90 x 3,000 = $14,700

Since the special order is at a discounted price, the actual increase in net operating income would be:

$14,700 - ($0.50 x 3,000) = $36,900

Therefore, the answer is C.

Elgot Company Produces a Single Product