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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?

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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
See Also This Related BrainMass Solution

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?

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