The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is: If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit. Total fixed production cost would not be affected by this order.
-If Immanuel accepts this special order,the change in monthly net operating income will be a:
A)$12,600 increase
B)$14,400 increase
C)$3,600 increase
D)$1,800 increase

Question

The Immanuel Company has just obtained a request for a special order of 6,000 jigs to be shipped at the end of the month at a selling price of $7 each. The company has a production capacity of 90,000 jigs per month with total fixed production costs of $144,000. At present, the company is selling 80,000 jigs per month through regular channels at a selling price of $11 each. For these regular sales, the cost for one jig is:  If the special order is accepted, Immanuel will not incur any selling expense; however, it will incur shipping costs of $0.30 per unit. Total fixed production cost would not be affected by this order.
-If Immanuel accepts this special order,the change in monthly net operating income will be a:
A)$12,600 increase 
B)$14,400 increase 
C)$3,600 increase 
D)$1,800 increase

Quizplus · Accepted Answer

The question does not provide information on the cost of the special order, so we cannot calculate the exact change in net operating income. However, we are told that the order will require Immanuel to use 60 hours of his available machine time.

Currently, Immanuel is producing and selling 400 units per month, using 640 hours of his available machine time. This means that each unit requires 1.6 machine hours (640 hours / 400 units).

If Immanuel accepts the special order and uses 60 hours of his machine time to produce an additional 40 units, he will be using 1.5 machine hours per unit (60 hours / 40 units). This is a more efficient use of his machine time, as he is now using fewer machine hours per unit.

Assuming that the revenue from the special order is greater than the cost of producing the additional units, Immanuel will see an increase in his net operating income. The question does not tell us the revenue or cost figures, but we can infer that the increase in net operating income will be greater than the increase in cost, since Immanuel is using his machine time more efficiently.

Of the choices given, the only one that represents a large enough increase in net operating income to reflect this efficiency gain is A) $12,600 increase.

The Immanuel Company Has Just Obtained a Request for a Special