Question
The Melville Company produces a single product called a Pong. Melville has the capacity to produce 60,000 Pongs each year. The regular selling price for
The Melville Company produces a single product called a Pong. Melville has the capacity to produce 60,000 Pongs each year. The regular selling price for one Pong is $80. If Melville produces at capacity, the per unit costs to produce and sell one Pong are as follows:
Direct materials....................................... $15
Direct labor............................................ 12
Variable manufacturing overhead............. 8
Fixed manufacturing overhead................. 9
Variable selling expense.......................... 8
Fixed selling expense.............................. 3
A customer has placed a special order to purchase 6,000 Pongs next year for $65 each. If this special order is accepted, the variable selling expense will be reduced by 75% (just on this order). However, Melville will have to purchase a specialized machine to engrave the customer's name on each Pong in the special order. This machine will cost $9,000 and it will have no use after the special order is filled. The total fixed manufacturing overhead and selling expenses would be unaffected by this special order. Assume Melville anticipates selling only 50,000 units of Pong to regular customers next year. If Melville agrees to the special order terms and fills the customer's order, what is the effect on Melville's operating income for next year?
a. $90,000 decrease
b. $99,000 decrease
c. $36,000 increase
d. $159,000 increase
e. $168,000 increase
f. $135,000 increase
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started