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 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 $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 $76.40 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?
A)$(17,000)
B)$13,400
C)$48,000
D)$(5,000)

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 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 $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 $76.40 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?
A)$(17,000) 
B)$13,400 
C)$48,000 
D)$(5,000)

Quizplus · Accepted Answer

The company currently has idle capacity, so the only cost associated with producing the units for the special order would be the variable cost per unit of $51.60. Therefore, the contribution margin per unit would be $24.80 ($76.40 - $51.60).

The special order is for 2,000 units, so the total increase in contribution margin would be $49,600 (2,000 units x $24.80 per unit). This would result in a net operating income increase of $48,000 ($49,600 - $1,600 in additional fixed costs).

Eley Corporation Produces a Single Product