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# The Effect on Net Income of a Special Order

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A company manufactures a product. The company can manufacture 1,200,000 units a year at a variable cost of \$3,000,000 and a fixed cost of \$1,800,000. Based on projections for next year, 960,000 units will be sold at the regular price of \$20.00 each. A special order has been received for 240,000 units to be sold at a 70% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased as a result of the special order?

#### Solution Preview

The basic cost-volume-profit formula is Sales revenue-Total variable costs-Total fixed costs=Net profit.
Further, Sales revenue-Total variable costs=Contribution Margin, or (sales volume*unit selling price)-(sales volume*unit variable cost)=contribution margin.
Factoring out sales volume, we find that Unit selling price-Unit variable costs=Unit ...

#### Solution Summary

A company manufactures a product. The company can manufacture 1,200,000 units a year at a variable cost of \$3,000,000 and a fixed cost of \$1,800,000. Based on projections for next year, 960,000 units will be sold at the regular price of \$20.00 each. A special order has been received for 240,000 units to be sold at a 70% discount off the regular price. Total fixed costs would be unaffected by this order. By what amount would the company's net operating income be increased as a result of the special order?

\$2.19

## 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