Question
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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