Rojo Corporation has received a request for a special order of 8,000 units of product W68 for $27.20 each.Product W68's unit product cost is $18.50,determined as follows: Direct labor is a variable cost.The special order would have no effect on the company's total fixed manufacturing overhead costs.The customer would like modifications made to product W68 that would increase the variable costs by $7.90 per unit and that would require an investment of $31,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales.The company has ample spare capacity for producing the special order.If the special order is accepted,the company's overall net operating income would increase (decrease)by:
A)$(4,400)
B)$69,600
C)$30,600
D)$(24,600)

Question

Rojo Corporation has received a request for a special order of 8,000 units of product W68 for $27.20 each.Product W68's unit product cost is $18.50,determined as follows:  Direct labor is a variable cost.The special order would have no effect on the company's total fixed manufacturing overhead costs.The customer would like modifications made to product W68 that would increase the variable costs by $7.90 per unit and that would require an investment of $31,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales.The company has ample spare capacity for producing the special order.If the special order is accepted,the company's overall net operating income would increase (decrease)by:
A)$(4,400) 
B)$69,600 
C)$30,600 
D)$(24,600)

Quizplus · Accepted Answer

The total revenue from the special order would be:
8,000 units × $27.20/unit = $217,600

The total variable cost of producing the special order would be:
8,000 units × ($18.50 + $7.90) = $213,200

The total cost of the special molds that would have no salvage value is not relevant for this decision since it is a sunk cost and does not affect the future cash flows.

Therefore, the contribution margin of the special order would be:
$217,600 - $213,200 = $4,400

Since the special order would not affect the company's total fixed manufacturing overhead costs, the overall net operating income would increase by the entire contribution margin of $4,400.

Therefore, the overall net operating income would increase by:
$4,400 + $26,200 (the contribution margin from the regular sales of 8,000 units) = $30,600

Therefore, the best choice is C) $30,600.

Rojo Corporation Has Received a Request for a Special Order