Question

Wiacek Corporation has received a request for a special order of 5,300 units of product F65 for $28.30 each. Product F65's unit product cost is $27.65, determined as follows: Direct materials $3.25 Direct labor 8.55 Variable manufacturing overhead 7.65 Fixed manufacturing overhead 8.20 Unit product cost $27.65 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 $4.60 per unit and that would require an investment of $17,000 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:

Answer 1

Answer:

Increase in contribution   $ 5525

Explanation:

The relevant cash flows to be considered for the special order include

1. The relevant variable cost
2. The the cost of the special mold.

Note that the fixed manufacturing overhead of 8.20 is irrelevant for the purpose of this decision. It will be incurred whether of not the order is accepted.

The amount by the operating income would be affected is determined as follows:

Unit variable cost of order =  3.25+8.55 +7.65 +4.60 = 24.05

Contribution from the order                                              $

(28.30 - 24.05)× 5,300                                              22525

Cost of special machine                                            ( 17,000)

Increase in contribution                                              5,525