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Special Order : explained

Attached Problem.

4. Vaden Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 50,000 units per month is as follows:

Direct materials $32.50
Direct labor 7.20
Variable manufacturing overhead 1.30
Fixed manufacturing overhead 20.90
Variable selling & administrative expense 1.90
Fixed selling & administrative expense 7.30

The normal selling price of the product is $75.00 per unit.

An order has been received from an overseas customer for 3,000 units to be delivered this month at a special discounted price. This order would have no effect on the company's normal sales price and would not change the total amount of the company's fixed costs. The variable selling and administrative expense would be $0.30 less per unit on this order than on normal sales.

Direct labor is a variable cost in this company.

Required :

a. Suppose there is ample idle capacity to produce the units required by the overseas customer and the special discounted price on the special order is $65.60 per unit. By how much would this special order increase (decrease) the company's net operating income for the month?
b. Suppose the company is already operating at capacity when the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

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Solution Preview

4. Vaden Company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 50,000 units per month is as follows:

Direct materials $32.50
Direct labor 7.20
Variable manufacturing overhead 1.30
Fixed manufacturing overhead 20.90
Variable selling & administrative expense 1.90
Fixed selling & administrative expense 7.30

The normal selling price of the product is $75.00 per unit.

An order has been received from an ...

Solution Summary

The solution explains how to determine the impact on the operating income of a special order under excess capacity and full capacity

$2.19