Question

A customer has requested that Inga Corporation fill a special order for 3,000 units of product K81 for $30 a unit. While the product would be modified slightly for the special order, product K81's normal unit product cost is $21.30:
Direct materials $ 5.40
Direct labor 6.00
Variable manufacturing overhead 2.50
Fixed manufacturing overhead 7.40
Unit product cost $21.30
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 K81 that would increase the variable costs by $1.00 per unit and that would require an investment of $14,000 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. $14,200
B. $31,300
C. $(13,700)
D. $(2,800)

Answer 1

Answer:

B. $31,300

Explanation:

Sales                                            $90,000

Less: Variable Cost                     $44,700

Less: Additional Fixed Cost        $14,000  

Increase in Operating Income  $31,300

Workings:

Sales= 3,000 unit * $30

Sales= 90,000

Variable cost = 3,000 unit * (5.4 + 6 + 2.5 +1)

Variable cost = 3,000 * 14.9

Variable cost = $44,700