Question
Corporate Wellness Ltd. is considering a special order of 20 exercise bikes to be manufactured for a customer. The normal selling price of an exercise
Corporate Wellness Ltd. is considering a special order of 20 exercise bikes to be manufactured for a customer. The normal selling price of an exercise bike is $500 and its unit product cost is $300.00 as shown below:
Direct Material $145
Direct Labour $105
Manufacturing Overhead $50
Unit Product Cost $300
Most of the manufacturing overhead is fixed and unaffected by variations in how many bikes are produced in any given period. However, $10 of the overhead is variable with respect to the number of bikes produced. The customer who is interested in the special order would like special decorations applied. These decorations would require additional materials costing $10 per bike and would also require acquisition of a special tool costing $465 that would have no other use once the special order is completed. This order would have effect on the company's regular sales. Specifically, accepting this order means that the company will not be able to manufacturing 5 units of its existing order.
Required:
What effect would accepting this order have on the company's net operating income if a special price of $460 is offered per bike for this order? Should the special order be accepted at this price?
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