California Industries has the capacity to produce up to 70,000 Gadgets per year. At that activity level, per unit costs to produce and sell one Gadget are:
|
Per unit |
| Direct materials |
$26.60 |
| Direct labor |
4.30 |
| Variable manufacturing overhead |
1.90 |
| Fixed manufacturing overhead |
11.10 |
| Variable selling & administrative expense |
1.50 |
| Fixed selling & administrative expense |
9.10 |
California normally sells its Gadgets for $56.60 per unit. A special order has been received from an overseas customer. They wish to purchase 2,000 Gadgets, specially engraved, to be delivered next year for $50.00 each. Variable selling and administrative expense would be reduced by 50% for the special order. However, California would have to purchase a new machine to engrave the customer's logo on each Gadget. The machine would cost $5,000 and it would have no use after the special order was filled. Total fixed costs (both manufacturing and selling and adminstrative) are constant over a relevant range of 40,000 to 70,000 Gadgets a year. California cannot increase capacity to accommodate special orders.
a) Assume that California expects to sell 68,000 Gadgets next year at the normal price. If they accept the special order, by how much would net operating income increase or decrease? (Indicate whether NOI would increase or decrease).
b) Assume that California expects to sell 68,000 Gadgets next year at the normal price. Determine the MINIMUM sales price (per unit) California would be willing to accept for the special order?
c) Assume that California expects to sell 69,000 Gadgets next year at the normal price. If they accept the special order, by how much would net operating income increase or decrease? (Indicate whether NOI would increase or decrease). Remember: California cannot increase capacity.