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The Melrose Corporation produces a single product, Product C. Melrose has the capacity to produce 106,000 units of Product C each year. If Melrose produces

The Melrose Corporation produces a single product, Product C. Melrose has the capacity to produce 106,000 units of Product C each year. If Melrose produces at capacity, the per unit costs to produce and sell one unit of Product C are as follows:

Direct materials $ 32.6
Direct labor $ 24.2
Variable manufacturing overhead $ 18.4
Fixed manufacturing overhead $ 23.0
Variable selling expense $ 15.6
Fixed selling expense $ 9.8

The regular selling price of one unit of Product C is $145.6. A special order has been received by Melrose from Moore Corporation to purchase 7,000 units of Product C during the upcoming year. If this special order is accepted, the variable selling expense will be reduced by 75%. Total fixed manufacturing overhead and fixed selling expenses would be unaffected except that Melrose will need to purchase a specialized machine to engrave the Moore name on each unit 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. Suppose Melrose can sell 104,000 units of Product C to regular customers next year. If Moore Corporation offers to buy the special order units at $135.6 per unit, the effect of accepting the special order for 7,000 units on Melrose's net operating income for next year will be a:

$156,500 increase

$111,000 increase

$346,500 increase

$167,000 increase

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