A customer has asked Clougherty Corporation to supply 4,000 units of product M97, with some modifications, for $40.10 each. The normal selling price of this product is $48.00 each. The normal unit product cost of product M97 is computed as follows:
Direct Material - $18.50
Direct Labor - $1.20
Variable Mfg OH - $8.40
Fixed Mfg OH - $3.90
Unit Product Cost - $32.00
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 some modifications made to product M97 that would increase the variable costs by $5.70 per unit and that would require a one-time investment of $31,000 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.
Determine the effect of the company's total net operating income of accepting the special order.
This solution illustrates how to determine the effect of a special order on a company's net operating income.