The Melville Company produces a single product called a Pong.Melville has the capacity to produce 60,000 Pongs each year. IfMelville produces at capacity, the per unit costs to produce andsell one Pong are as follows. Use the data for questions 7 to 9.Direct materials- $15 Direct labor- 12 Variable manufacturingoverhead- 8 Fixed manufacturing overhead- 9 Variable sellingexpense- 8 Fixed selling expense- 3 The regular selling price forone Pong is $80. A special order has been received by Melville fromMowen Company to purchase 6,000 Pongs next year. If this specialorder is accepted, the variable selling expense will be reduced by75%. However, Melville will have to purchase a specialized machineto engrave the Mowen name on each Pong in the special order. Thismachine will cost $9,000 and it will have no use after the specialorder is filled. The total fixed manufacturing overhead and sellingexpenses would be unaffected by this special order.
Assume Melville can sell 58,000 units of Pong to regularcustomers next year and sell 6000 units to this special ordercustomer will result in losing the contribution on sales to regularcustomers at the regular price due to the 60,000 unit maximumproduction capacity. If Mowen Company offers to buy the specialorder units at $65 per unit, the effect of accepting the specialorder on Melville's operating income next year should be a:
A 36000 increase
B 11000 increase
C 192000 increase
D 47000 increase
The Melville Company produces a single product called a Pong.Melville has the capacity to produce 60,000 Pongs each year. IfMelville produces at capacity, the per unit costs to produce andsell one Pong are as follows. Use the data for questions 7 to 9.Direct materials- $15 Direct labor- 12 Variable manufacturingoverhead- 8 Fixed manufacturing overhead- 9 Variable sellingexpense- 8 Fixed selling expense- 3 The regular selling price forone Pong is $80. A special order has been received by Melville fromMowen Company to purchase 6,000 Pongs next year. If this specialorder is accepted, the variable selling expense will be reduced by75%. However, Melville will have to purchase a specialized machineto engrave the Mowen name on each Pong in the special order. Thismachine will cost $9,000 and it will have no use after the specialorder is filled. The total fixed manufacturing overhead and sellingexpenses would be unaffected by this special order.
Assume Melville can sell 58,000 units of Pong to regularcustomers next year and sell 6000 units to this special ordercustomer will result in losing the contribution on sales to regularcustomers at the regular price due to the 60,000 unit maximumproduction capacity. If Mowen Company offers to buy the specialorder units at $65 per unit, the effect of accepting the specialorder on Melville's operating income next year should be a:
A 36000 increase
B 11000 increase
C 192000 increase
D 47000 increase
Related questions
The Melrose Corporation produces a single product, Product C.Melrose has the capacity to produce 70,000 units of Product C eachyear. If Melrose produces at capacity, the per unit costs toproduce and sell one unit of Product C are as follows:
| Direct materials | $20 |
| Direct labor | $17 |
| Variable manufacturingoverhead | $13 |
| Fixed manufacturingoverhead | $14 |
| Variable selling expense | $12 |
| Fixed selling expense | $8 |
The regular selling price of one unit of Product C is $100. Aspecial order has been received by Melrose from Moore Corporationto purchase 7,000 units of Product C during the upcoming year. Ifthis special order is accepted, the variable selling expense willbe reduced by 75%. Total fixed manufacturing overhead and fixedselling expenses would be unaffected except that Melrose will needto purchase a specialized machine to engrave the Moore name on eachunit of product C in the special order. The machine will cost$10,500 and will have no use after the special order is filled.Assume that direct labor is a variable cost.
Assume Melrose expects to sell 60,000 units of Product C to regularcustomers next year. If Moore company offers to buy the 7,000special units at $90 per unit, the effect of accepting the specialorder on Melrose's net operating income for next year will be:
$42,000 increase
$54,000 decrease
$105,000 increase
$248,500 increase
Imperial Jewelers is considering a special order for 23handcrafted gold bracelets to be given as gifts to members of awedding party. The normal selling price of a gold bracelet is$407.00 and its unit product cost is $275.00 as shown below:
| Direct Materials | $149 |
| Direct labor | $87 |
| Manufacturing Overhead | $39 |
| Unit Product cost | $275 |
Most of the manufacturing overhead is fixed and unaffected byvariations in how much jewelry is produced in any given period.However, $11 of the overhead is variable with respectto the numberof bracelets produced. The customer who is interested in thespecial bracelet order would like special filigree applied to thebracelets. This filigree would require additional materials costing$10 per bracelet and would also require acquisition of a specialtool costing $452 that would have no other use once the specialorder is completed. This order would have no effect on thecompanyâs regular sales and the order could be fulfilled using thecompanyâs existing capacity without affecting any other order.
Required:
What effect would accepting this order have on the companyâs netoperating income if a special price of $367.00 per bracelet isoffered for this order?
Per unit | Total 23 bracelets | |
Incremental revenue | ||
Incremental costs | ||
Variable costs: | ||
Direct materials | ||
Direct labor | ||
Variable manufacturing overhead | ||
Special filigree | ||
Total variable cost | ||
Fixed costs: | ||
Purchase of special tool | ||
Total incremental cost | ||
Incremental net operating income (loss) |
Should the special order be accepted at this price?
Yes
No
