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Special Orders and Effect on Net Operating Income

Hancock Hoodies is considering a special order for 100 hoodies for a local company party. The normal selling price of a hoodie is $30 and its unit production cost is $16 as shown below.

Direct materials $6
Direct labor $3
Manufacturing overhead $7
Unit product cost $16

Most of he manufacturing overhead is fixed and unaffected by variations in how many hoodies are produced in a given period. However, $2 of the overhead is variable with respect to the number of hoodies produced. The customer who is interested in the special hoodie order would like a special silkscreen put onto the hoodies. This silkscreen would require additional materials costing $4 per hoodies and would require ordering of the design costing $100 that would have no other use once the special order is completed. This order would have no effect on the company's regular sales, and the order could be fulfilled using the company's existing capacity without affecting other orders.

What effect would accepting this order have on the company's net operating income if a special price of $17 is offered per hoodie for this order? Should the company accept the order?

Solution Preview

$17 x 100 = 1,700.00

DM 6 x 100 = 600.00
DL 3 x 100 = 300.00
MOH 2 x 100 = ...

Solution Summary

This solution calculates the effect on Hancock Hoodies net operating income if the special order is accepted. This solution also explains if the special order should be expected based on the results of accepting or declining the offer.