Question: The Melville Company manufacture a single product called a Pong. Melville has the capacity to produce 60,000 Pongs each year. If Melville produces at capacity, per unit value to produce and sell one Pong are as follows:
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Direct materials
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$15
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Direct labor
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12
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Variable manufacturing overhead
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8
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Fixed manufacturing overhead
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9
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Variable selling expense
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8
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Fixed selling expense
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3
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The regular selling value for one Pong is $80. A special order has been received by Melville from Mowen firm to buy 6,000 Pongs next year. If this special order is accepted, variable selling expense will be reduced by 75 percent. However, Melville will have to buy a specialized machine to engrave Mowen name on each Pong in the special order. This machine will cost $9,000 & it will have no use after special order is filled. The total fixed manufacturing overhead & selling costs would be unaffected by this special order.
Suppose Melville anticipates selling only 50,000 units of Pong to regular customers next year. If Mowen Company offers to purchase the special order units at $65 per unit, effect of accepting the special order on Melville's operating income for next year should be a:
Select one answer.
[1] $60,000 increase
[2] $90,000 decrease
[3] $159,000 increase
[4] $36,000 increase